IMF paper on growing threat of moral hazard

An IMF paper published in March says governments and central banks must address the threat posed by large systemically important financial institutions to reduce moral hazard.

Stijn Claessens, Ceyla Pazarbasioglu, Luc Laeven, Marc Dobler, Fabian Valencia, Oana Nedelescu and Katharine Seal, the paper's authors, compare the policy choices of governments and central banks in recent and past crises and assess the current state of financial and operational restructuring and institutional reforms.

The authors find that confidence in financial systems continues to be highly dependent on explicit and implicit central bank and government support, and that moral hazard has increased as sectors become more concentrated and financial systems are still prone to stress and turmoil. They argue measures to restore proper incentives and market discipline are needed for governments and central banks to reduce the threat large financial institutions pose to systemic stability, including through reduced complexity, better capital structures, and, possibly, restrictions on their scope and activities.

Click here to read the paper