by Thomas M. Hoenig
September 17, 2013
For the last 100 years, government officials and bank CEOs have insisted that new policies, rules, and laws would ensure that future financial crises, should they occur, would be more effectively handled. Incentives matter and the incentives toward risk taking among the largest financial firms remain basically unchanged from pre-crisis times. To change outcomes, you must change incentives. With the safety net, you alter the market’s incentives, create moral hazard, and drive toward leverage that creates its own set of adverse consequences. There are three steps that I suggest be taken to control these negative effects: limit the safety net’s protection, simplify and strengthen capital adequacy standards, and improve bank supervision.