Wiktionary
n. (context banking economics English) The forces in a free market which tend to control and limit the riskiness of a financial institution investment and lending activities, such as the concern of depositors for the safety of their deposits and the concern of bank investors for the safety and soundness of their institutions.
Wikipedia
Buyers and sellers in a market are said to be constrained by market discipline in setting prices because they have strong incentives to generate revenues and avoid bankruptcy. This means, in order to meet economic necessity, buyers must avoid prices that will drive them into bankruptcy and sellers must find prices that will generate revenue (or suffer the same fate).
Market discipline is a topic of particular concern because of banking deposit insurance laws. Most governments offer deposit insurance for people making deposits with banks. Normally, bank managers have strong incentives to avoid risky loans and other investments. However, mandated deposit insurance eliminates much of the risk to bankers. This constitutes a loss of market discipline. In order to counteract this loss of market discipline, governments introduce regulations aimed at preventing bank managers from taking excessive risk. Today market discipline is introduced into the Basel II Capital Accord as a pillar of prudential banking regulation.
The efficacy of regulations aimed at introducing market discipline is questionable. Financial bailouts provide implicit insurance schemes like too-big-to-fail, where regulators in central agencies feel obliged to rescue a troubled bank for fear of financial contagion. It can be argued that depositors would not bother to monitor bank activities under these favorable circumstances. There are numerous academic studies on this subject. The findings, at first, had mixed and somewhat discouraging results where market discipline did not appear to be an essential feature in banking. Later studies, though, when including some of the previously missing key aspects into the empirical analysis, supported the existence and significance of such a natural control mechanism unambiguously. Accordingly, depositors 'discipline' bank activities to some extent depending on the well functioning of financial markets and institutions.
Usage examples of "market discipline".
That's the kind of market discipline that the poor are to be subjected to.
It was a kind of market discipline, if you want to look at it that way, and He was the only one with the brains to see it and the guts to do something about it.
We have a dual system -- protection for the rich and market discipline for everyone else.