Moral Hazard in Banking: The Recent Argentine Experience
Government regulated deposit safety nets, whether explicit or implicit, should be seen first and foremost as a means towards protecting the public from market imperfections. Because of information asymmetry, depositors do not know the quality (that is, the risk) of the deposit service provided by financial institutions. Apart from this direct rationale for deposit safety nets there is another, more indirect rationale. Bank runs and, especially, bank panics may affect the public at large due to the negative externalities that they can generate. A deposit safety net may prevent depositors from triggering such runs and panics if it makes them feel sufficiently protected.
KeywordsCovariance Assure Argentina Volatility
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