> So banks are incentivised to not create debt that is too-risky -- i.e. where the ratio of potential non-performing loans is too high for the interest rate they lend at, or the interest rate of raising expensive additional capital would get too high...
Thereoretically yes. However, 2008 moral hazard (heads I win, tails you lose) of excessive mortgage lending and securitisation put paid to that notion. Staff of bailed out banks were getting their bonuses again in 2009[1].
It also touches on the principal/agent problem, where bank executives and traders don't really care if the shareholders get wiped out and the taxpayer picks up the tab. They'll get their bonus and bounce to the next opportunity if the bank itself goes belly up.
Additionally, the Justice Department refused to bring criminal charges against bank exectutives[2].
So, you'll load up on risk to make excess short term profit, maybe your bank will go bust, but you'll never face charges and may get a nice bonus next year at your bank, or bounce to the next bank. Must be nice.
Thereoretically yes. However, 2008 moral hazard (heads I win, tails you lose) of excessive mortgage lending and securitisation put paid to that notion. Staff of bailed out banks were getting their bonuses again in 2009[1].
It also touches on the principal/agent problem, where bank executives and traders don't really care if the shareholders get wiped out and the taxpayer picks up the tab. They'll get their bonus and bounce to the next opportunity if the bank itself goes belly up.
Additionally, the Justice Department refused to bring criminal charges against bank exectutives[2].
So, you'll load up on risk to make excess short term profit, maybe your bank will go bust, but you'll never face charges and may get a nice bonus next year at your bank, or bounce to the next bank. Must be nice.
[1] https://abcnews.go.com/Business/story?id=8214818&page=1
[2] https://www.newyorker.com/news/john-cassidy/didnt-eric-holde...