#96-46
"Stopping Information Asymmetries in Government from Promoting Risk Shifting by Banks"
Abstract: Bank managers are said to shift risks when the downside of the profit opportunities that the bank pursues is absorbed in nontransparent fashion by the bank's creditors and guarantors. Risk shifting is facilitated by information asymmetries that tempt government officials to show creditors and taxpayers about how effectively government bureaus are controlling bank risk. The growing sophistication of financial products and financial institutions' net risk-taking positions demands a regulatory regime that—like Pinocchio's nose—can create and enforce incentives for transparency and truth-telling about the nature and value of taxpayers' implicit stake in regulated financial institutions.
This paper was presented at the Financial Institutions Center's October 1996 conference on "Risk Management in Banking."
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