EconPapers    
Economics at your fingertips  
 

Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?

Kevin C. Murdock, Thomas Hellmann () and Joseph Stiglitz

American Economic Review, 2000, vol. 90, issue 1, 147-165

Abstract: In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2000
Note: DOI: 10.1257/aer.90.1.147
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (699) Track citations by RSS feed

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.1.147 (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:90:y:2000:i:1:p:147-165

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().

 
Page updated 2020-10-15
Handle: RePEc:aea:aecrev:v:90:y:2000:i:1:p:147-165