Badly managed banks pay higher premiums to secure federal deposit
insurance. But this disincentive is woefully inadequate and
disproportionate to the enormous benefits reaped by virtue of having a
safety net. Stern dismisses this approach:
"The ability of regulators to contain moral hazard directly is limited.
Moral hazard results when economic agents do not bear the marginal
costs of their actions. Regulatory reforms can alter marginal costs but
they accomplish this task through very crude and often exploitable
tactics. There should be limited confidence that regulation and
supervision will lead to bank closures before institutions become
insolvent. In particular, reliance on lagging regulatory measures,
restrictive regulatory and legal norms, and the ability of banks to
quickly alter their risk profile have often resulted in costly
failures."
Stern concludes his remarks by repeating the age-old advice: caveat
emptor. Let depositors and creditors suffer losses. This will enhance
their propensity to discipline market players. They are also likely to
become more selective and invest in assets which conform to their risk
aversion.
Both outcomes are highly dubious.
Pages:
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73