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

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  • Salter, Alexander W.
  • Veetil, Vipin
  • White, Lawrence H.

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.

Suggested Citation

  • Salter, Alexander W. & Veetil, Vipin & White, Lawrence H., 2017. "Extended shareholder liability as a means to constrain moral hazard in insured banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 153-160.
  • Handle: RePEc:eee:quaeco:v:63:y:2017:i:c:p:153-160
    DOI: 10.1016/j.qref.2016.04.006
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    Cited by:

    1. Hendrickson, Joshua R. & Salter, Alexander W., 2018. "Going beyond monetary constitutions: The congruence of money and finance," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 22-28.
    2. Salter, Alexander William & Young, Andrew T., 2018. "Would a free banking system stabilize NGDP growth?," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 21-25.
    3. Murphy Ryan H., 2020. "Corporations as the Outgroup?," Man and the Economy, De Gruyter, vol. 7(1), pages 1-8, June.

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    More about this item

    Keywords

    Bagehot hypothesis; Deposit insurance; Double liability; Moral hazard; Triple liability; Unlimited liability;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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