Leverage and Risk Taking under Moral Hazard

Christian Hott

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper examines the impact of implicit guarantees and capital regulations on the behavior of a bank and on the expected losses for its depositors. I show that implicit guarantees increase the incentives of the bank to enhance leverage and/or risk taking and that this leads to higher expected losses for its depositors. To reduce the adverse effects of moral hazard, policy measures have to be taken. However, a simple leverage ratio is likely to increase expected losses further and risk adjusted capital requirements do not necessarily affect highly leveraged banks with very low risk assets. A combination of both requirements can be successful. Positive long-term effects can be achieved by a reduction of moral hazard and informational imperfections. However, it is difficult to achieve these reductions and potentially severe short-term effects have to be taken into account.

JEL-codes: G18 G21 G32 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban and nep-rmg
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Related works:
Journal Article: Leverage and Risk Taking under Moral Hazard (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79960

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