Bailout

Moral hazard datapoint of the day

By Felix Salmon

In order to believe that there was a connection between moral hazard and the financial crisis, says Jim Surowiecki,

you also have to believe that the banks knew that what they were doing was reckless, and that there was a meaningful chance that it would wreck their companies, but decided that it was still worth doing because if everything went south, the government would step in. And that, even before Dimon?s comment yesterday, always seemed improbable.

But look what has happened in Sweden, when the government imposed a too-big-to-fail fee on its biggest banks, to help make up for the fact that it would have to bail them out in the event of a crisis.

According to Swedish officials, the stability fee has been welcomed by the banks that dominate the financial system. Smaller credit and financing companies complained bitterly, though, arguing that they would never be helped by the government in the event of a failure.

Maybe this is just the difference between Swedes and Americans — but I do think that there is a very real benefit to banks of having a government backstop. And they know it.

Full post as published by Macroprudential on January 23, 2010 (boomark / email).