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# Bank Market Discipline

## Definition

The regulatory effect of market forces on bank behaviour, including the threat of note redemption, competition from other banks, and the consequences of imprudent lending. This discipline helps maintain banking stability without excessive formal regulation.

## Source Chapter

Book II, Chapter 2

## Context

Smith argues that market forces naturally discipline banks by threatening their profitability and survival if they behave imprudently. He shows how this market discipline can be more effective than formal regulation in maintaining banking stability.

## Economic Domain

Regulation

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