Rather, the prices also incorporate the value of expected supervisory and regulatory actions should their financial condition deteriorate. These perceptions and levels of government guarantee vary substantially across firms. For example, the corrective actions used by bank supervisors to deal with undercapitalized banks are intended to encourage market discipline and to deter the expectation of regulatory forbearance.
In addition, encouraging the issuance of financial market instruments, such as subordinated debt, can provide an important antidote to conjectures of government guarantees and to the misperception that some institutions are "too big to fail." The threat of prohibited payments on the subordinated debt of an institution that becomes undercapitalized should be useful in ensuring vigilance by debt investors.