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Safety Nets and Moral Hazard in Banking

In: Financial Stability in a Changing Environment

Author

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  • George J. Benston

    (Emory University)

Abstract

In banking,’ safety nets’ refer to government guarantees provided to depositors and sometimes to all bank creditors. When some banks are considered to be ‘too big to fail’, and therefore are given assistance, the safety net covers all of the bank’s stakeholders, including customers, employees, and (usually to a lesser extent) stockholders. ‘Moral hazard’ refers to the adverse incentives engendered by these safety nets. Because they do not fear losing their funds, depositors and possibly other creditors do not monitor banks as carefully as otherwise. In the absence of other constraints, bank owners and managers, therefore, have incentives to take greater risks than they would have taken, without the safety net. The essential questions considered here are how costly is the problem, and what can and should be done about this situation?

Suggested Citation

  • George J. Benston, 1995. "Safety Nets and Moral Hazard in Banking," Palgrave Macmillan Books, in: Kuniho Sawamoto & Zenta Nakajima & Hiroo Taguchi (ed.), Financial Stability in a Changing Environment, chapter 8, pages 329-385, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-13352-9_9
    DOI: 10.1007/978-1-349-13352-9_9
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    Citations

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    Cited by:

    1. George J. Benston & George G. Kaufman, 1997. "FDICIA after five years: a review and evaluation," Working Paper Series, Issues in Financial Regulation WP-97-01, Federal Reserve Bank of Chicago.
    2. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
    3. George J. Benston, 2004. "What's Special About Banks?," The Financial Review, Eastern Finance Association, vol. 39(1), pages 13-33, February.
    4. Larry D. Wall, 1997. "Taking note of the deposit insurance fund: a plan for the FDIC to issue capital notes," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 1), pages 14-30.
    5. George Benston, 2007. "Basel II and Bankers’ Propensity to Take or Avoid Excessive Risk," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 373-382, December.
    6. George J. Benston & Paul Irvine & Jim Rosenfeld & Joseph F. Sinkey, 2000. "Bank capital structure, regulatory capital, and securities innovations," FRB Atlanta Working Paper 2000-18, Federal Reserve Bank of Atlanta.

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