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Excessive risk-taking by banks is often associated with economic recession. A key question for policy and for the academic literature is why banks take excessive risk. There are two (non-mutually-exclusive) views. First, the moral hazard view implies that conflicts of interest (agency problems) between bank shareholders/managers and bank debt ...
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Aug 27, 2020 · Bankers knew the risks they were taking before the 2008 crisis. Excessive risk-taking by banks is often associated with economic recession. A key question for policy and for the academic literature is why banks take excessive risk. There are two (non-mutually-exclusive) views. First, the moral hazard view implies that conflicts of interest ...
Nov 8, 2024 · With respect to the marginal effect of excess liquidity on bank risk-taking behaviours, the coefficients of EPU and EPU × Crisis in Equation Equation (2) (2) ∂ Risk ∂ Excess = α 2 + α 3 EPU + α 4 EPU × Crisis (2) were both negative. Based on these results, our explanation is that when a country’s EPU in the current year is higher than the previous year (EPU = 1), the positive impact ...
- S&L Crisis Sets The Stage
- Short-Term Incentives
- A Familiar Ring
- The Big Picture
The precursor to the banking crises of the 21st century was the savings and loan crisis of the 1980s. The so-called S&L crisis, like the collapse of SVB, began in a rapidly changing interest rate environment. Savings and loan banks, also known as thrifts, provided home loans at attractive interest rates. When the Federal Reserve under Chairman Paul...
The 2008 crisis is another obvious example of incentive structures that encourage risky strategies. At all levels of mortgage financing – from Main Street lenders to Wall Street investment firms – executives prospered by taking excessive risks and passing them to someone else. Lenders passed mortgages made to people who could not afford themonto Wa...
That brings us back to Silicon Valley Bank. Executives tied up the bank’s assets in long-term Treasury and mortgage-backed securities, failing to protect against rising interest rates that would undermine the value of these assets. The interest rate risk was particularly acute for SVB, since a large share of depositors were startups, whose finances...
So, what’s to be done? We believe the bipartisan bill recently filed in Congress, the Failed Bank Executives Clawback, would be a good start. In the event of a bank failure, the legislation would empower regulators to claw backcompensation received by bank executives in the five-year period preceding the failure. Clawbacks, however, kick in only af...
May 13, 2015 · It takes into account the risk-shifting behavior of inadequately capitalized banks that causes financial fragility and calculates the optimal level of minimum tier-one capital requirements at 8%. This exceeds what is prescribed by both the Basel II and III accords, but it is below what many believe is needed for financial stability (e.g., Acharya, Engle, and Richardson 2012 ; Admati and ...
- Anjan V. Thakor
- 2015
Mar 30, 2012 · Risk-taking by banks played a critical role in the global crisis and Eurozone crisis. This column introduces a new eReport that focuses on four aspects of excessive risk-taking by banks, highlighting the causes and the cures. The eReport applies the best available theory and data, bringing together the main insights and views that have emerged from the crisis.
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Nov 1, 2020 · Under these circumstances, research interest in bank risk-taking behavior has gained momentum. Most studies have examined environmental variables, interest rates, and monetary policy in combination with the increased risk taken by banks, in an attempt to ascertain some of the likely causes of the financial and subsequent economic crisis.
