Market discipline ensures that the market provides yet another set of eyes. The third pillar is intended to strengthen incentives for prudent risk management. Greater transparency in banks’ financial reporting should allow marketplace participants to better reward well-managed banks and penalize poorly-managed ones. There are disclosure requirements to allow market participants to assess key information relating to the scope of application, capital, risk exposure, and risk assessment process. These disclosures include both quantitative and qualitative aspects. Internal methodologies allow banks discretion in assessing capital requirements.
