Rapid and volatile capital inflows or outflows can present significant policy challenges – potentially leading to exchange rate overshooting, asset price volatility and financial instability. In this context, appropriate and pragmatic use of capital account regulations may have to be considered by emerging markets in order to maintain financial stability if considered necessary. Market discipline 28.
In the past, it has been argued that market discipline can play a key role in incentivising market participants to limit their excessive risk taking activities. However, the events of the last few years have proved the inadequacy of market discipline and bankers have been engaged in risk-taking activities disguised as value-creation.