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

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

Research output: Contribution to journalArticle

2 Scopus citations

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.

Original languageEnglish
Pages (from-to)153-160
Number of pages8
JournalQuarterly Review of Economics and Finance
Volume63
DOIs
StatePublished - Feb 1 2017

Keywords

  • Bagehot hypothesis
  • Deposit insurance
  • Double liability
  • Moral hazard
  • Triple liability
  • Unlimited liability

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