Reflecting risk-management practices outside the firm Information and incentives play an important role not just within an institution, but also outside it. By this I mean the ability of the marketplace – and supervisors, when necessary – to gather information about financial institutions and give the right signals to bank management about risk taking.
Naturally, this requires proper disclosure of information by the financial institution so that depositors, counterparties, shareholders, and other market participants can judge the riskiness of the institution and act accordingly. Institutions that are able to provide a continual and accurate flow of information to market participants generally benefit from such transparency.