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Extended shareholder liability as a means to constrain moral hazard in insured banks

Alexander Salter, Vipin Veetil and Lawrence White ()

The Quarterly Review of Economics and Finance, 2017, vol. 63, issue C, 153-160

Abstract: Extended liability for bank shareholders offers a possible method for mitigating moral hazard in insured banks. The dominant approach to maintaining financial stability seeks to constrain banks’ profit-maximizing responses to distorted incentives by means of ad hoc restrictions. By contrast, extended liability seeks to create healthier incentives. We examine how a variety of extended liability regimes worked historically, and consider leading concerns about their potential disadvantages. We conclude by discussing how extended liability avoids the difficulties of both ‘microprudential and ‘macroprudential’ approaches to systemic stability.

Keywords: Bagehot hypothesis; Deposit insurance; Double liability; Moral hazard; Triple liability; Unlimited liability (search for similar items in EconPapers)
JEL-codes: E42 E44 G21 (search for similar items in EconPapers)
Date: 2017
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