Channeling the information provided by market assessments of financial institutions and organizing opportunities for public comment on the regulatory process can play a key role in achieving a self-critical, dynamic regulatory system. Incorporating market discipline into the regulatory system Despite years of interesting academic work on incorporating market discipline into financial regulation, it has to this point been consigned to a mostly cosmetic role.
One obvious consequence of this neglect was that moral hazard grew unchecked, as expectations of government support for the financial system meant that potential losses from risky behavior – even where understood by market participants – were not fully internalized by the counterparties of, and investors in, large financial institutions.