Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?

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Kevin C. Murdock; Thomas F. Hellmann; Joseph E. Stiglitz;
  • Journal: American Economic Review,volume 90,issue 1 March,pages147-165
  • Related identifiers: doi: 10.1257/aer.90.1.147
  • Subject:
    • jel: jel:G21 | jel:G28

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity a... View more
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