What economic principles should policymakers in other countries have learned from the S&L mess? Appropriate incentives for government supervisors are critical for avoidance of financial crises.(savings and loan)
From: Business Economics
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Date: 1/1/2003
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Author: Kane, Edward J.
For individual institutions' insolvencies to trigger a national financial crisis, cumulative losses across an important industry sector must exceed the safety-net support that creditors expect the government to provide. This happens when official supervisors acquiesce to pressure of threatened institutions to engage in risky lending in an effort to stay afloat. Such regulatory risk-taking takes the form of insurance against failure and concealment of the magnitude of the risks to ...
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