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This is an example of moral hazard, since the bank engages in risky behavior because it believes it has insurance against downside risks. If the government is considered likely to step in and reduce losses incurred by banks, bankers will have an incentive to take on more risk and increase the financial fragility of the banking system.
2. The Moral Hazard Hypothesis Moral hazard is a problem in financial systems with the following characteristics: · banks are leveraged, • banks have limited liability, • markets have asymmetric information about the risks banks take, and • banks are rescued with some probability when they get into trouble.
- 634KB
- Barry Eichengreen, Ricardo Hausmann
- 56
- 1999
Sep 21, 2023 · Concerns about the risk-boosting effects of moral hazard are not limited to the financial realm. They show up any time that governments offer any form of “safety net” to firms or individuals, including social supports like health insurance, unemployment benefits, or sickness benefits.
Mar 16, 2023 · Paradoxically, moral hazard has been used to justify contradictory policy options to safeguard European financial system stability, such as decentralized institutional arrangements for banking supervision but also a centralized system coordinated by the European Central Bank (ECB).
study how uncertainty about the government’s information set can mitigate the moral hazard associated with bailouts. 3 socially-valuable maturity transformation and makes investors more willing to stay invested.
- 530KB
- Todd Keister
- 40
- 2016
Oct 26, 2023 · Key Takeaways. The 2007-2008 financial crisis was caused by a confluence of many factors, including the Dotcom bubble burst, a low interest rate environment, financial products such as...
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Apr 17, 2019 · This chapter argues that, since the 1980s, moral hazard has encouraged excessive indebtedness and contributed to greater leniency from regulators and financial gatekeepers towards systemic banks.
