Moral Hazard in Banking Essay -- essays papers

moral Hazard in Banking Moral endangerment is an asymmetric information problem that occurs after a transaction. In essence, a lender runs the happen that a borrower will engage in activities that are undesirable 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 moral hazard problem inherent to the financial safety net provided by the government protection of depositors. pursual rates do not reflect 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 supervision and dominion. In the article, Stern challenges the assertion that proposals that rely exclusively on government regulation will satisfy the problem of moral hazard, especially for TBTFs (To o Big to Fail banks). Stern states several factors to support such assertions&61623 The big businessman of regulators to contain moral hazard directly 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 internal bank models that may be inaccurate.&...