Moral Hazard in Banking Essay -- essays papers

Moral Hazard in Banking Moral fortune is an crooked information problem that occurs after a transaction. In essence, a loaner runs the risk that a borrower will engage in activities that argon unenviable from the lenders point of view, making it less likely that the loan will be paid back. Gary H. Sterns article, Managing Moral Hazard with Market Signals How Regulation Should Change with Banking, addresses the honourable hazard problem inherent to the financial safety net provided by the government protection of depositors. Interest rates do not theorize the risk associated with bank activity, which in turn causes banks to finance higher-risk projects with price tags that are not parallel to the risk level. A solution to the moral hazard problem lies within government inadvertence and regulation. In the article, Stern challenges the assertion that proposals that rely exclusively on government regulation will avenge the problem of moral hazard, especially for TBTFs (Too Big to Fail banks). Stern states some(prenominal) factors to support such assertions&61623 The competency of regulators to contain moral hazard straight off is limited, due to the exploitable tactics of regulatory reform.&61623 Limited confidence that regulation and supervision will lead to bank closures before institutions become insolvent.&61623 The limited ability of regulators to asses bank risk due to asymmetric information and reliance of intragroup bank models that may be inaccurate.&...