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

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  • 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.

Suggested Citation

  • Robert L. Hetzel, 2009. "Should increased regulation of bank risk-taking come from regulators or from the market?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 161-200.
  • Handle: RePEc:fip:fedreq:y:2009:i:spr:p:161-200:n:v.95no.2
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    File URL: http://richmondfed.org/publications/research/economic_quarterly/2009/spring/pdf/hetzel1.pdf
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    References listed on IDEAS

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    Cited by:

    1. Francis, Bill & Gupta, Aparna & Hasan, Iftekhar, 2015. "Impact of compensation structure and managerial incentives on bank risk taking," European Journal of Operational Research, Elsevier, vol. 242(2), pages 651-676.

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    Keywords

    Banks and banking ; Risk;

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