Bank Bailouts And Moral Hazard Evidence From Banks Investment And Financing Decisions
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Author | : Gary H. Stern |
Publisher | : Rowman & Littlefield |
Total Pages | : 247 |
Release | : 2004-02-29 |
Genre | : Business & Economics |
ISBN | : 0815796366 |
The potential failure of a large bank presents vexing questions for policymakers. It poses significant risks to other financial institutions, to the financial system as a whole, and possibly to the economic and social order. Because of such fears, policymakers in many countries—developed and less developed, democratic and autocratic—respond by protecting bank creditors from all or some of the losses they otherwise would face. Failing banks are labeled "too big to fail" (or TBTF). This important new book examines the issues surrounding TBTF, explaining why it is a problem and discussing ways of dealing with it more effectively. Gary Stern and Ron Feldman, officers with the Federal Reserve, warn that not enough has been done to reduce creditors' expectations of TBTF protection. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible, resulting in significant net costs to the economy. The authors recommend that policymakers enact a series of reforms to reduce expectations of bailouts when large banks fail.
Author | : Mr.Giovanni Dell'Ariccia |
Publisher | : International Monetary Fund |
Total Pages | : 54 |
Release | : 2018-09-07 |
Genre | : Business & Economics |
ISBN | : 1484359623 |
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Author | : Mr.Luis Brandão Brandao Marques |
Publisher | : International Monetary Fund |
Total Pages | : 36 |
Release | : 2013-05-02 |
Genre | : Business & Economics |
ISBN | : 1484379136 |
Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk taking by banks, especially during the financial crisis (2009-10). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.
Author | : Mr.Giovanni Dell'Ariccia |
Publisher | : International Monetary Fund |
Total Pages | : 41 |
Release | : 2013-06-06 |
Genre | : Business & Economics |
ISBN | : 1484381130 |
We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
Author | : World Bank |
Publisher | : World Bank Publications |
Total Pages | : 307 |
Release | : 2019-11-22 |
Genre | : Business & Economics |
ISBN | : 1464814961 |
Over a decade has passed since the collapse of the U.S. investment bank, Lehman Brothers, marked the onset of the largest global economic crisis since the Great Depression. The crisis revealed major shortcomings in market discipline, regulation and supervision, and reopened important policy debates on financial regulation. Since the onset of the crisis, emphasis has been placed on better regulation of banking systems and on enhancing the tools available to supervisory agencies to oversee banks and intervene speedily in case of distress. Drawing on ten years of data and analysis, Global Financial Development Report 2019/2020 provides evidence on the regulatory remedies adopted to prevent future financial troubles, and sheds light on important policy concerns. To what extent are regulatory reforms designed with high-income countries in mind appropriate for developing countries? What has been the impact of reforms on market discipline and bank capital? How should countries balance the political and social demands for a safety net for users of the financial system with potentially severe moral hazard consequences? Are higher capital requirements damaging to the flow of credit? How should capital regulation be designed to improve stability and access? The report provides a synthesis of what we know, as well as areas where more evidence is still needed. Global Financial Development Report 2019/2020 is the fifth in a World Bank series. The accompanying website tracks financial systems in more than 200 economies before, during, and after the global financial crisis (http://www.worldbank.org/en/publication/gfdr) and provides information on how banking systems are regulated and supervised around the world (http://www.worldbank.org/en/research/brief/BRSS).
Author | : Allen N. Berger |
Publisher | : Academic Press |
Total Pages | : 476 |
Release | : 2020-06-05 |
Genre | : Business & Economics |
ISBN | : 0128138645 |
Financial crises are recurring phenomena that result in the financial distress of systemically important banks, making it imperative to understand how to best respond to such crises and their consequences. Two policy responses became prominent for dealing with these distressed institutions since the last Global Financial Crisis: bailouts and bail-ins. The main questions surrounding these responses touch everyone: Are bailouts or bail-ins good for the financial system and the real economy? Is it essential to save distressed financial institutions by putting taxpayer money at risk in bailouts, or is it better to use private money in bail-ins instead? Are there better options, such as first lines of defense that help prevent such distress in the first place? Can countercyclical prudential and monetary policies lessen the likelihood and severity of the financial crises that often bring about this distress? Through careful analysis, authors Berger and Roman review and critically assess the extant theoretical and empirical research on many resolution approaches and tools. Placing special emphasis on lessons learned from one of the biggest bailouts of all time, the Troubled Asset Relief Program (TARP), while also reviewing other programs and tools, TARP and Other Bank Bailouts and Bail-Ins around the World sheds light on how best to protect the financial system on Wall Street and the real economy on Main Street.
Author | : Mark Osiel |
Publisher | : Harvard University Press |
Total Pages | : 513 |
Release | : 2019-02-25 |
Genre | : Law |
ISBN | : 0674368258 |
Common morality—in the form of shame, outrage, and stigma—has always been society’s first line of defense against ethical transgressions. Social mores crucially complement the law, Mark Osiel shows, sparing us from oppressive formal regulation. Much of what we could do, we shouldn’t—and we don’t. We have a free-speech right to be offensive, but we know we will face outrage in response. We may declare bankruptcy, but not without stigma. Moral norms constantly demand more of us than the law requires, sustaining promises we can legally break and preventing disrespectful behavior the law allows. Mark Osiel takes up this curious interplay between lenient law and restrictive morality, showing that law permits much wrongdoing because we assume that rights are paired with informal but enforceable duties. People will exercise their rights responsibly or else face social shaming. For the most part, this system has worked. Social order persists despite ample opportunity for reprehensible conduct, testifying to the decisive constraints common morality imposes on the way we exercise our legal prerogatives. The Right to Do Wrong collects vivid case studies and social scientific research to explore how resistance to the exercise of rights picks up where law leaves off and shapes the legal system in turn. Building on recent evidence that declining social trust leads to increasing reliance on law, Osiel contends that as social changes produce stronger assertions of individual rights, it becomes more difficult to depend on informal tempering of our unfettered freedoms. Social norms can be indefensible, Osiel recognizes. But the alternative—more repressive law—is often far worse. This empirically informed study leaves little doubt that robust forms of common morality persist and are essential to the vitality of liberal societies.
Author | : Amy Finkelstein |
Publisher | : Columbia University Press |
Total Pages | : 161 |
Release | : 2014-12-02 |
Genre | : Medical |
ISBN | : 0231538685 |
Addressing the challenge of covering heath care expenses—while minimizing economic risks. Moral hazard—the tendency to change behavior when the cost of that behavior will be borne by others—is a particularly tricky question when considering health care. Kenneth J. Arrow’s seminal 1963 paper on this topic (included in this volume) was one of the first to explore the implication of moral hazard for health care, and Amy Finkelstein—recognized as one of the world’s foremost experts on the topic—here examines this issue in the context of contemporary American health care policy. Drawing on research from both the original RAND Health Insurance Experiment and her own research, including a 2008 Health Insurance Experiment in Oregon, Finkelstein presents compelling evidence that health insurance does indeed affect medical spending and encourages policy solutions that acknowledge and account for this. The volume also features commentaries and insights from other renowned economists, including an introduction by Joseph P. Newhouse that provides context for the discussion, a commentary from Jonathan Gruber that considers provider-side moral hazard, and reflections from Joseph E. Stiglitz and Kenneth J. Arrow. “Reads like a fireside chat among a group of distinguished, articulate health economists.” —Choice
Author | : Mr.Stijn Claessens |
Publisher | : International Monetary Fund |
Total Pages | : 66 |
Release | : 2013-01-30 |
Genre | : Business & Economics |
ISBN | : 1475561008 |
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
Author | : Itay Goldstein |
Publisher | : |
Total Pages | : 80 |
Release | : 2015-12-15 |
Genre | : Business & Economics |
ISBN | : 9781680830842 |
In this monograph, we review three branches of theoretical literature on financial crises. The first deals with banking crises originating from coordination failures among bank creditors. The second deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third deals with currency crises. We discuss the evolutions of these branches in the literature, and how they have been integrated recently to explain the turmoil in the world economy during the East Asian crises and in the last few years. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.