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Should increased regulation of bank risk-taking come from regulators or from the market?

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Author Info
Robert L. Hetzel
Abstract

The heavy losses in bank asset portfolios do not reflect an inherent failure of markets to monitor risk adequately but rather the perverse incentives of the financial safety net to excessive risk-taking. The unsustainable rise in house prices and their subsequent sharp decline derived from the combination of a public policy to expand home ownership to unrealistic levels and from a financial safety net that encouraged excessive risk-taking by banks.

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File URL: http://richmondfed.org/publications/research/economic_quarterly/2009/spring/pdf/hetzel1.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2009)
Issue (Month): Spr ()
Pages: 161-200
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Handle: RePEc:fip:fedreq:y:2009:i:spr:p:161-200:n:v.95no.2

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Related research
Keywords: Banks and banking ; Risk;

References listed on IDEAS
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  5. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56. [Downloadable!]
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    Other versions:
  7. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  8. Mertens, Karel, 2008. "Deposit rate ceilings and monetary transmission in the US," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1290-1302, October. [Downloadable!] (restricted)
  9. William Roberds, 1995. "Financial crises and the payments system: lessons from the National Banking Era," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 15-31.
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  11. Adam B. Ashcraft & Morten L. Bech & W. Scott Frame, 2008. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Staff Reports 357, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  12. Gerald P. Dwyer, Jr., 1996. "Wildcat banking, banking panics, and free banking in the United States," Economic Review, Federal Reserve Bank of Atlanta, issue Dec, pages 1-20. [Downloadable!]
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