A discussion of past instances of moral hazard in the banking industry and reforms to limit its impact in the future.
Written in 2005; 931 words; 4 sources; MLA; $ 33.95
Paper Summary:
Applied strictly to the banking industry, moral hazard refers to the risk exposure of financial institutions and is often caused when a statutory authority provides some kind of financial safety net, such as deposit insurance. This paper looks at moral hazard as it applies to the banking sector and discusses past instances of failure in the banking sector attributed to it. It closes with a discussion of reforms enacted in Australia to minimise the impact of moral hazard on Australian financial institutions.
From the Paper:
"Moral hazard hit the United States savings and loan industry hard in the 1980's, when a lot of highly speculative and risky investments were made by the owners of savings and loan institutions. Owners of these institutions found that it was possible to attract a large pool of government insured deposits that could be invested, with little restriction, in these risky projects that had the potential to generate large profits. As the capital was insured by the full faith and credit of the United States government, managers had little incentive to manage the risk exposure of their investment portfolios (Pindyke & Rubinfeld, 2001, p. 608-9)."
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