Different regulatory regimes and banking crises - The role of moral hazard
(2023) NEKH02 20231Department of Economics
- Abstract
- Since 1988 there have been international attempts to regulate banks
with the Basel Rules; despite these international efforts to regulate banks within the Basel Rules, the rules have been insufficient. The financial crisis of 2008 highlighted the importance of regulatory oversight in the banking sector. The crisis resulted in strengthened regulatory approaches worldwide, within the USA and Europe, adopting various liquidity and capital regulations to avoid future mistakes. Later on, bonus regulations were also implemented to avoid future extensive risk-taking. However, the recent bank crises, such as the collapse of SVB and other financial institutions, demonstrate that banking regulation is essential to prevent misconduct. For instance,... (More) - Since 1988 there have been international attempts to regulate banks
with the Basel Rules; despite these international efforts to regulate banks within the Basel Rules, the rules have been insufficient. The financial crisis of 2008 highlighted the importance of regulatory oversight in the banking sector. The crisis resulted in strengthened regulatory approaches worldwide, within the USA and Europe, adopting various liquidity and capital regulations to avoid future mistakes. Later on, bonus regulations were also implemented to avoid future extensive risk-taking. However, the recent bank crises, such as the collapse of SVB and other financial institutions, demonstrate that banking regulation is essential to prevent misconduct. For instance, in 2018, the American government decided to roll back the Dodd-Frank Act that was implemented after the financial crisis, which may have weakened the regulatory framework for the US banking sector and been a pivotal part of the new bank crises.
This thesis explores how different approaches to regulating banks lead to different
outcomes and how moral hazard affects these decisions. Through the theoretical
framework of moral hazard, the thesis analyzes the impact of liquidity regulations and bonus caps on the behavior of banks in Europe and the United States. The study
finds that the absence of a bonus cap in the US may increase the risk of moral
hazard, as management teams and boards are more incentivized to take higher
risks. In contrast, Europe's bonus cap system is designed to minimize the personal
gain of taking chances on behalf of customers, stock owners, and taxpayers,
therefore abstracting moral hazard from the calculation. Additionally, the study
reflects on the impact of a risk-based regulatory approach and different liquidity
regulations and how tighter liquidity regulations may reduce the risk of moral hazard, as they limit the ability of banks to engage in excessive risk-taking behavior. The study also shows what will occur if the authorities increase the liquidity regulations and implement more restrictions on the sector. Overall, the study contributes to the ongoing debate about the optimal regulatory approach for the banking sector and the effects of moral hazard. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9136402
- author
- Olsson-Lejon, Felix LU
- supervisor
- organization
- course
- NEKH02 20231
- year
- 2023
- type
- M2 - Bachelor Degree
- subject
- keywords
- Moral hazard, Bonus regulations, Liquidity regulations, Silicon Valley Bank
- language
- English
- id
- 9136402
- date added to LUP
- 2024-01-22 15:44:46
- date last changed
- 2024-01-22 15:44:46
@misc{9136402,
abstract = {{Since 1988 there have been international attempts to regulate banks
with the Basel Rules; despite these international efforts to regulate banks within the Basel Rules, the rules have been insufficient. The financial crisis of 2008 highlighted the importance of regulatory oversight in the banking sector. The crisis resulted in strengthened regulatory approaches worldwide, within the USA and Europe, adopting various liquidity and capital regulations to avoid future mistakes. Later on, bonus regulations were also implemented to avoid future extensive risk-taking. However, the recent bank crises, such as the collapse of SVB and other financial institutions, demonstrate that banking regulation is essential to prevent misconduct. For instance, in 2018, the American government decided to roll back the Dodd-Frank Act that was implemented after the financial crisis, which may have weakened the regulatory framework for the US banking sector and been a pivotal part of the new bank crises.
This thesis explores how different approaches to regulating banks lead to different
outcomes and how moral hazard affects these decisions. Through the theoretical
framework of moral hazard, the thesis analyzes the impact of liquidity regulations and bonus caps on the behavior of banks in Europe and the United States. The study
finds that the absence of a bonus cap in the US may increase the risk of moral
hazard, as management teams and boards are more incentivized to take higher
risks. In contrast, Europe's bonus cap system is designed to minimize the personal
gain of taking chances on behalf of customers, stock owners, and taxpayers,
therefore abstracting moral hazard from the calculation. Additionally, the study
reflects on the impact of a risk-based regulatory approach and different liquidity
regulations and how tighter liquidity regulations may reduce the risk of moral hazard, as they limit the ability of banks to engage in excessive risk-taking behavior. The study also shows what will occur if the authorities increase the liquidity regulations and implement more restrictions on the sector. Overall, the study contributes to the ongoing debate about the optimal regulatory approach for the banking sector and the effects of moral hazard.}},
author = {{Olsson-Lejon, Felix}},
language = {{eng}},
note = {{Student Paper}},
title = {{Different regulatory regimes and banking crises - The role of moral hazard}},
year = {{2023}},
}