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How to remove the risk of a moral hazard in banks? watch

    • Thread Starter

    A moral hazard is just the fact that banks know their too big to fail so will continue to take high risks knowing the gov will bail them out.

    Im currently learning about finance in econ and i just thought why dont the gov just fire all the bosses of banks that fail then they wont hav an incentive to take high risks cos the bank itself will be bailed but they will lose their job.

    Btw if i got the definition of moral hazard wrong soz im not an expert just started learning about this and thought their is easy solution to solve the moral hazard
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    It's called crony capitalism. Private profits and public liabilities.
    If you are studying economics I can highly recommend this you tube piece by Peter Schiff where he gamefully enters the lion den of the 99% at the Occupy Wall Street demo with a big sign saying" I am the 1%. Let's talk"
    He lays out brilliantly why the banks should have been allowed to fail.
    Watch it with an open mind.


    Two hours long but fascinating to watch how he interacts with mostly Left-winger and many communists and Marxists.

    big banks have an incentive to take on riskier projects because of the implicit guarantee that the government will rescue them to avoid systemic consequences eg Lehman Brothers

    typically a way to avoid moral hazard with major banks is to impose a covenant (covenant is a type of contract in which the covenanter makes a promise to a covenantee to do or not do some action).

    Why don't the government fire the execs? Because they can't. And even if they could the execs would be entitled to massive payouts as per their contracts. The banks are indeed too big to fail, but the government has addressed this to a point by requiring the banks to have much more money set aside so they don't fail as in 2008. The government can regulate and does fine banks that break the rules.
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