Global Moral Hazard, Capital Account Liberalization and the “Overlending Syndrome”

Eduardo Levy Yeyati

No 1999/100, IMF Working Papers from International Monetary Fund

Abstract: The removal of government guarantees in borrowing countries does not eliminate the moral hazard problem posed by the existence of deposit guarantees in lender countries. The paper shows that, after restrictions on international capital flows are lifted, banks in low-risk developed countries benefit from lending funds captured in home markets at low deposit rates to high-risk/high-yield projects in emerging economies, even though these projects command lower expected returns. This, in turn, has a negative impact on bank profitability in the borrowing country, even when foreign funds are intermediated through domestic banks. The results are consistent with the surge in international bank lending flows that led to recent banking crises in Asia.

Keywords: WP; capital account; Banking Crises; Capital Account Liberalization; Deposit Insurance; Moral Hazard; risk profile; high-yield project; bank profit; loan issue; lender bank; bank shareholder; maximization problem; Deposit rates; Commercial banks (search for similar items in EconPapers)
Pages: 22
Date: 1999-07-01
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1999/100

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