Should Increased Regulation of Bank Risk-Taking Come from Regulators or from the Market?
FRB Richmond Economic Quarterly, Vol. 95, No. 2, Spring 2009, pp. 161-200
40 Pages Posted: 13 Dec 2012
Date Written: 2009
The heavy losses in bank asset portfolios do not reflect an inherent failure of markets to monitor risk adequately but rather the perverse incentives of the financial safety net to excessive risk-taking. The unsustainable rise in house prices and their subsequent sharp decline derived from the combination of a public policy to expand home ownership to unrealistic levels and from a financial safety net that encouraged excessive risk-taking by banks.
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