Reliance on public bail-outs, unaccompanied by any threat that management, shareholders and creditors would share significant losses, created an asymmetric incentive for excessive risk taking by financial institutions.
Source quote, verbatim
The reliance on a public bail-out without the threat of any significant losses shared by management, shareholders and creditors may have created an asymmetric incentive for excessive risk taking by financial institutions.
From
Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012), 3. The German Banking Reorganization Act of 2010, p. 33 https://ssrn.com/abstract=2061166 · source PDF
Cite as
Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012). SSRN: https://ssrn.com/abstract=2061166
Holds when
Germany and the United States during the height of the financial crisis
where insolvency was not a credible threat
Classification
mechanismsupport: arguedfailure: Bail-out expectation removes the loss threat and skews risk incentivesfamily: moral-hazard-and-bailout-expectationrisk-and-incentivessystemic-risk
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