Still, we should not put all our faith in regulation. It has limits. If the structure of banking creates incentives to take excessive risk then regulators will be overwhelmed by the avarice so vividly captured by Michael Lewis in his book The Big Short. Incentives must be right. One misalignment of incentives today is the implicit guarantee to banks that are "too important to fail", so that creditors have little incentive to monitor the behaviour of banks because they believe they will be bailed out. This problem is too important to ignore.It's not the first time he's made a point of letting people know that he understands how incentives matter and that moral hazard is a serious problem which has to be allowed for.
17 June 2010
Quote of the Day
From Mervyn King's Mansion House Speech:
Posted by Paul Lockett