Hidden loan losses, moral hazard and financial crises

J.-P. Niinimaki

Journal of Financial Stability, 2012, vol. 8, issue 1, 1-14

Abstract: This paper introduces two methods of hiding loan losses and analyzes how they affect a bank's loan interest income, payments on deposits, liquidity and moral hazard. The analysis reveals that a hiding method represents a Ponzi scheme. Contrary to classic theory, e.g. Diamond (1984), moral hazard may arise even though a bank's loan portfolio is diversified. Alternative instruments to eliminate hiding are investigated. Under specific circumstances, a Ponzi scheme may provide a socially optimal method to create liquidity and prevent a failure of a solvent but illiquid bank.

Keywords: Banking; Evergreening; Deposit insurance; Liquidity; Forbearance lending (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:8:y:2012:i:1:p:1-14

DOI: 10.1016/j.jfs.2009.08.001

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