Bankers and scapegoats

Abstract

It is commonly believed that banks are in special need of regulation to prevent financial crises, and the recent sub-prime crisis would tend to support such views. Yet it is clear that a series of perverse incentives exist in the banking industry. Incentives for bankers to take on too much risk lead to financial crises, and then a lack of a bankruptcy process for large financial institutions lead to massive taxpayer bail-outs. This chapter canvasses the issues surrounding the sub-prime crisis and explores arguments relating to regulation and the political economy of the recent crisis. As long as the political cost-benefit of having inefficient banking regulation dominates an economic cost-benefit of having efficient regulation, we can expect that perverse incentives will remain and financial crises will be a regular feature of the economic landscape.

Citation

Davidson, S. (2010), "Bankers and scapegoats", Kim, S.-J. and Mckenzie, M.D. (Ed.) International Banking in the New Era: Post-Crisis Challenges and Opportunities (International Finance Review, Vol. 11), Emerald Group Publishing Limited, Leeds, pp. 119-134. https://doi.org/10.1108/S1569-3767(2010)0000011008