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Choudhry, Moorad and Landuyt, Gino (2009) Government policy and the financial sector : dealing with moral hazard and "too-big-to-fail". Centre for International Capital Markets discussion papers, 2009 (15). pp. 1-16. ISSN 1749-3412
The large-scale interventions by Western governments in 2008 aimed at underpinning the banking system have confirmed the extent of state support for the financial sector. The explicit backing of the “lender of last resort” has reemphasised the moral hazard problem. Without further reform of the markets, the current infrastructure has become one in which private sector profits are privatised, but losses are socialised at taxpayer expense. This paper assesses the extent of moral hazard risk now inherent in the banking system, and makes recommendations that will help to mitigate this risk. We provide policy suggestions in the areas of central bank communications, systemic risk, and dealing with the too-big-to-fail bank.
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