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Article: ANALYSIS: MORAL HAZARD AND RISK - II

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United Press International
Article date:
May 31, 2002
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Analysis: Moral hazard and risk - II

SKOPJE, Macedonia, May 31, 2002 (United Press International via COMTEX) -- Established economic theory pioneered by Nobel prizewinner Robert C. Merton in 1977 shows that, counterintuitively, the closer a bank is to insolvency, the more inclined it is to risky lending. Nobuhiko Hibara of Columbia University demonstrated this effect convincingly in the Japanese banking system in his November 2001 draft paper titled "What Happens in Banking Crises -- Credit Crunch vs. Moral Hazard."

Last but by no means least, as opposed to oft-reiterated wisdom the markets have no memory. Russia has egregiously defaulted on its sovereign ...

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