Asymmetric information, adverse selection and moral hazard in the banking industry

Author(s): Rajapatirana, Sarath; McCaskie, Patrick W (1999)

Created 22 Jul, 1999
Categories Working Papers
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This paper theoretically reviews asymmetric information and byproducts, adverse selection and moral hazards in the banking industry and linked them as key structural sources that caused the Asian crisis. These derive from factors of divergent interest, decision makers being insured against some of the consequences of their actions (Deposit Insurance and Lender of last Resort coverage), monitoring and enforcement being imperfect and the other pertinent factors. This paper reveals that the Asian authorities appeared not to have capitalised on the lessons learnt from the US Savings and Loans crises. However the analyses and recommendations presented in this paper should help lead to more informed and focused policy prescriptions as the new International Financial Architecture takes shape.

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