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Overstating Moral Hazard: Lessons from Two Decades of Banking Crises

76 Pages Posted: 9 Mar 2017 Last revised: 17 Mar 2017

Douglas W. Arner

University of Hong Kong - Faculty of Law

Emilios Avgouleas

University of Edinburgh - School of Law

Evan Gibson

The University of Hong Kong - Asian Institute of International Financial Law

Date Written: March 8, 2017

Abstract

Over the past two decades a variety of banking system rescue approaches have been used, including in the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2010 European debt crisis. By analysing the resolution of these crises as well as the approach to addressing bad loans in the People’s Republic of China, this paper provides a new perspective on the common belief that bailouts are invariably harmful to public funds or excessively conducive to moral hazard. Depending on the form of bailout, bank restructuring, and fiscal backstop, resolutions can be an effective means to restore a banking system. This paper argues that in a systemic financial crisis, a combination of balance sheet restructuring and the use of asset management companies to deal with non-performing loans is often the best choice. However, a fully-fledged resolution that triggers the bail-in procedure remains the best approach for non-systemically important financial institution failures which take place outside of systemic crises, namely when the failure is idiosyncratic.

Keywords: Financial Crisis; Bank Rescues; Bailouts; Asset Management Companies; Moral Hazard

JEL Classification: G21, G28, G32, G33

Suggested Citation

Arner, Douglas W. and Avgouleas, Emilios and Gibson, Evan, Overstating Moral Hazard: Lessons from Two Decades of Banking Crises (March 8, 2017). University of Hong Kong Faculty of Law Research Paper No. 2017/003. Available at SSRN: https://ssrn.com/abstract=2929574

Douglas W. Arner (Contact Author)

University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Emilios Avgouleas

University of Edinburgh - School of Law ( email )

Old College
South Bridge
Edinburgh, EH8 9YL
United Kingdom

Evan Gibson

The University of Hong Kong - Asian Institute of International Financial Law ( email )

Faculty of Law, Pokfulam Road
Pokfulam
Hong Kong
Hong Kong

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