Moral Hazard and Too Big to Fail
While some might be inclined to say, “It’s different over here.” I think that they are fooling themselves. Many of the issues that banking is facing in England are the same as they are here. Many of the banks who run Wall Street have significant operations in London and vice versa.
What is Moral Hazard again? It’s basically creating a scenario where there is no risk with the reward. Kind of like saying, if you win, you get the prize and if you don’t win, we’ll still give you the prize anyway.
Mr. King is England’s Ben Bernanke and his point is essentially that we need to make sure that the banking system doesn’t allow the people who take risks to put the financial welfare of so many at risk through their activities.
Food for thought, that’s for sure.
Tom Vanderwell
Mervyn King: bail-outs created ‘biggest moral hazard in history’ – Telegraph
In comments which will be seen as a clarion call for a potential break-up of Britain’s banks, the Bank of England Governor warned that the support handed out by the Government had “created possibly the biggest moral hazard in history”. He said that it was insufficient to expect that in the future tighter regulations alone would be enough to prevent banks from generating financial crises.
The warning goes against the grain of efforts by Governments on both sides of the Atlantic, which have tacitly ruled out splitting up the biggest banks and opted instead to scrutinise them more actively. Mr King, who said earlier this year that if banks are “too big to fail, then…they are too big,” said that there is a risk the financial crisis comes and goes but the current system, in which big banks enjoy an effective guarantee from the state, remains.
In a speech in Edinburgh, he said “It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong.”
Technorati Tags: Banks, Too Big to Fail, Moral Hazard
