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Safety Nets and Moral Hazard in Banking

  • George J. Benston

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?

Keywords

Moral Hazard Deposit Insurance Equity Holder Debt Holder Federal Deposit Insurance Corporation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© The Bank of Japan 1995

Authors and Affiliations

  • George J. Benston
    • 1
  1. 1.Business School and Department of EconomicsEmory UniversityUSA

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