Excessive Lending, Leverage, and Risk-Taking in the Presence of Bailout Expectations
Author/Editor: Andréas Georgiou
Release Date: © October, 2009
ISBN: 978-1-45187-380-1
Stock #: WPIEA2009233
English
Stock Status: Available
Languages and formats available
| English | French | Spanish | Arabic | Russian | Chinese | Portuguese | |
| Paperback | Yes | ||||||
| Yes |
Description
The financial crisis that began in 2007 has brought to the fore the issues of excesses in lending, leverage, and risk-taking as some of the fundamental causes of this crisis. At the same time, in dealing with the financial crisis there have been large scale interventions by governments, often referred to as bailouts of the lenders. This paper presents a framework where rational economic agents engage in ex ante excessive lending, borrowing, and risk-taking if creditors assign a positive probability to being bailed out. The paper also offers some thoughts on policy implications. It argues that it would be most productive for the long run if lending institutions were not bailed out. If the continuing existence of an institution was deemed essential, assistance should take the form of capital injections that dilute the equity of existing owners.
Keywords
Bailout, Excessive Lending, Excessive Risk, Moral Hazard, Banking Sector, Borrowing, Economic Models, Financial Risk, Intervention, Nonbank Financial Sector, General Financial Markets
Taxonomy
Banks and banking,
Economic development,
Economic policy,
Financial crisis,
Financial institutions and markets,
Fiscal policy,
International financial system,
Investment,
Loans
More publications in this series: Working Papers
More publications by: Andréas Georgiou
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