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Article: Regulatory Moral Hazard: The Real Moral Hazard in Federal Deposit Insurance.
- Article from:
- Independent Review
- Article date:
- September 22, 1999
- Author:
CopyrightCOPYRIGHT 1999 Independent Institute. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Many banking regulators, academics, and others hold that deposit insurance creates an undesirable moral hazard in banking. But the real moral hazard that federal deposit insurance creates is regulatory moral hazard. In this article I describe regulatory moral hazard, explain why depositor discipline of banks is highly undesirable, show how federal deposit insurance fosters regulatory moral hazard and propose a cross-guarantee concept for privatizing banking regulation so as to eliminate regulatory moral hazard in banking.
Moral Hazard
A moral hazard exists when a decision maker takes risks that he otherwise would not have taken, because the adverse ...