Safety Nets and Moral Hazard in Banking

George J. Benston
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George J. Benston: Emory University

Chapter 8 in Financial Stability in a Changing Environment, 1995, pp 329-385 from Palgrave Macmillan

Abstract: Abstract In banking,’ safety nets’ refer to government guarantees provided to depositors and sometimes to all bank creditors. When some banks are considered to be ‘too big to fail’, and therefore are given assistance, the safety net covers all of the bank’s stakeholders, including customers, employees, and (usually to a lesser extent) stockholders. ‘Moral hazard’ refers to the adverse incentives engendered by these safety nets. Because they do not fear losing their funds, depositors and possibly other creditors do not monitor banks as carefully as otherwise. In the absence of other constraints, bank owners and managers, therefore, have incentives to take greater risks than they would have taken, without the safety net. The essential questions considered here are how costly is the problem, and what can and should be done about this situation?

Keywords: Moral Hazard; Deposit Insurance; Equity Holder; Debt Holder; Federal Deposit Insurance Corporation (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-13352-9_9

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DOI: 10.1007/978-1-349-13352-9_9

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