Market discipline can improve financial stability by aligning risks and rewards more closely. When risks are both known and measured, they are reflected in asset prices. To this end, bank regulators must continue to strive to develop risk-based capital measures that better reflect underlying risks.
At least as important as getting capital levels right, however, are new capital frameworks to provide financial markets with better information on risk-taking by banks. In particular, by leading the development of new capital adequacy regimes, the Fed is actively working to improve the flow of information about financial institutions to market participants.