scholarly journals Risk Taking, Limited Liability and the Competition of Bank Regulators

10.3386/w8669 ◽  
2001 ◽  
Author(s):  
Hans-Werner Sinn
Keyword(s):  
Risk Taking ◽  
Limited Liability

scholarly journals Capital requirements, risk-taking and welfare in a growing economy

2021 ◽  
Author(s):  
Pierre-Richard Agénor ◽  
Luiz A. Pereira da Silva
Keyword(s):  
Risk Taking ◽  
Default Risk ◽  
Limited Liability ◽  
Capital Requirements ◽  
Optimal Choice ◽  
Capital Adequacy ◽  
Financial Supervision ◽  
Capital Adequacy Ratio ◽  
Monitoring Effort ◽  
Growing Economy

AbstractThe effects of capital requirements on risk-taking and welfare are studied in an overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky, more productive but socially inefficient, technology. Bank risk-taking is endogenous. As a result of a skin in the game effect—motivated either as an aggregate externality, or as the outcome of the optimal choice of monitoring effort by individual banks—default risk is inversely related to the capital adequacy ratio. Numerical simulations show that in an equilibrium where banks extend both safe and risky loans, the skin in the game effect must be sufficiently strong for a welfare-maximizing regulatory policy to exist. These results remain qualitatively similar with endogenous monitoring costs and a strong effect of monitoring on entrepreneurial moral hazard. However, numerical experiments also suggest that the optimal capital adequacy ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

scholarly journals Convergence in Corporations Law - Towards a Facilitative Model

1996 ◽  
Vol 26 (2) ◽  
pp. 191 ◽  
Author(s):  
David Goddard
Keyword(s):  
Risk Taking ◽  
Buenos Aires ◽  
International Association ◽  
Limited Liability ◽  
Significant Degree ◽  
Ius Commune ◽  
Modern Economy ◽  
Convergence And Divergence ◽  
Degree Of Convergence ◽  
Insight Into

The following is the Report of the General Reporter on the Law of Corporations presented to the Annual Colloquium of the International Association of Legal Science (the 1995 IALS Colloquium) which was held in Buenos Aires in September 1995. The theme of the conference was "Towards a modern ius commune: converging trends in a changing world". This article argues that there has been a significant degree of convergence internationally in the general approach of states to corporations law. The article begins by setting out the purpose and justifications of corporations in a modern economy: the division of ownership interest into shares, the limited liability of the shareholders, and the nature of risk-taking and risk-bearing. The article then provides the evidence of both convergence and divergence in corporations law, ultimately arguing for there being a convergence. The author also provides some insight into the likely directions for convergence. The author concludes that the overall movement towards a facilitative model of corporations law is a self-reinforcing process which can be expected to become even more widespread and rapid in the future. 

scholarly journals Optimal contracts with a risk‐taking agent

2020 ◽  
Vol 15 (2) ◽  
pp. 715-761 ◽  
Author(s):  
Daniel Barron ◽  
George Georgiadis ◽  
Jeroen Swinkels
Keyword(s):  
Risk Taking ◽  
Limited Liability ◽  
Risk Averse ◽  
Trade Off ◽  
Optimal Contracts ◽  
Risk Neutral ◽  
Profit Maximizing ◽  
Over Time

Consider an agent who can costlessly add mean‐preserving noise to his output. To deter such risk‐taking, the principal optimally offers a contract that makes the agent's utility concave in output. If the agent is risk‐neutral and protected by limited liability, this concavity constraint binds and so linear contracts maximize profit. If the agent is risk averse, the concavity constraint might bind for some outputs but not others. We characterize the unique profit‐maximizing contract and show how deterring risk‐taking affects the insurance‐incentive trade‐off. Our logic extends to costly risk‐taking and to dynamic settings where the agent can shift output over time.

scholarly journals Optimal Monetary and Prudential Policies

2017 ◽  
Vol 9 (1) ◽  
pp. 40-87 ◽  
Author(s):  
Fabrice Collard ◽  
Harris Dellas ◽  
Behzad Diba ◽  
Olivier Loisel
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Deposit Insurance ◽  
Limited Liability ◽  
Capital Requirements ◽  
Bank Capital ◽  
The Business Cycle ◽  
Recent Financial Crisis ◽  
The Interest Rate ◽  
Excessive Risk Taking

The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically. (JEL E32, E43, E44, E52, G01, G21, G28)

Risk-Taking Behavior with Limited Liability and Risk Aversion

1997 ◽  
Vol 64 (2) ◽  
pp. 347 ◽  
Author(s):  
Christian Gollier ◽  
Pierre-Francois Koehl ◽  
Jean-Charles Rochet
Keyword(s):  
Risk Aversion ◽  
Risk Taking ◽  
Limited Liability ◽  
Risk Taking Behavior

scholarly journals Risk-Taking Under Limited Liability: Quantifying the Role of Motivated Beliefs

2021 ◽  
Author(s):  
Ciril Bosch-Rosa ◽  
Daniel Gietl ◽  
Frank Heinemann
Keyword(s):  
Risk Taking ◽  
Limited Liability

scholarly journals LIMITED LIABILITY, MORAL HAZARD, AND RISK TAKING: A SAFETY NET GAME EXPERIMENT

2012 ◽  
Vol 51 (2) ◽  
pp. 1389-1403 ◽  
Author(s):  
SASCHA FÜLLBRUNN ◽  
TIBOR NEUGEBAUER
Keyword(s):  
Moral Hazard ◽  
Risk Taking ◽  
Limited Liability ◽  
Safety Net ◽  
Hazard And Risk

scholarly journals A Behavioural-economic Perspective on Conflicts of Interest Among Shareholders, Debtholders, and Directors

2020 ◽  
pp. 026010792093420
Author(s):  
Daisuke Asaoka
Keyword(s):  
Risk Taking ◽  
Loss Aversion ◽  
Psychological Factors ◽  
Conflicts Of Interest ◽  
Limited Liability ◽  
Economic Incentives ◽  
Legal Institutions ◽  
Directors And Officers ◽  
Excessive Risk Taking ◽  
Excessive Risk

Corporations have conflicts of interest among shareholders, debtholders and directors, and, corporate law gives each party avenues to pursue others, while protecting themselves. While debtholders are exposed to excessive risk-taking by directors and abuse of limited liability by shareholders, they are protected by legal institutions like directors’ liabilities to third parties and piercing of the corporate veil. Shareholders are subject to the risk of veil-piercing and director negligence, but they are protected by derivative suits. And directors, while under threat of liability suits by debtholders and shareholders, are protected by the business judgement rule, liability exemption and liability insurance of directors and officers (D&O). This web of legal institutions comprises a dual structure of economic and psychological factors, built upon economic incentives but also upon such psychological factors as bounded rationality, the chilling effect, the desire for certainty, loss aversion and the sense of fairness. Any change in the balance will affect their behaviour; greater protection of directors, for example, provokes greater risk-taking, both economically and psychologically. JEL: K22, G41, D91

Sunflower management and life insurance: modeling the CEO’s utility function

2019 ◽  
Vol 11 (3) ◽  
pp. 309-323
Author(s):  
Jyh-Horng Lin ◽  
Fu-Wei Huang ◽  
Shi Chen
Keyword(s):  
Utility Function ◽  
Life Insurance ◽  
Risk Taking ◽  
Limited Liability ◽  
Chief Executive ◽  
Insurance Company ◽  
Life Insurance Company ◽  
Content Type ◽  
Loan Rate ◽  
Interest Margin

Purpose The purpose of this paper is to develop a theoretical framework to answer the following question: What are the consequences of sunflower behavior as well as spread behavior for how asset-liability management is administrated in a life insurance company? Design/methodology/approach This paper takes into account the following: the chief executive officer (CEO) of a life insurance company confirms the board of directors’ belief – the preference of the like of higher return relative to the dislike of higher risk; the authors call such behavior sunflower management; the life insurance policyholder is entitled to a guaranteed interest rate and a participation percentage of the company’s investment surplus; and the authors examine the optimal insurer interest margin, i.e., the spread between the loan rate and the guaranteed rate. Findings Sunflower management translates into lower utility for the CEO and makes the CEO more prudent to risk-taking at an increased insurer interest margin for the provision of life insurance contracts. The effect of the guaranteed rate on the margin is ambiguous and depends on the level of guarantee itself. An increase in the participation level decreases the CEO’s loan risk-taking at an increased margin. It is shown that a trend toward higher return like of the board’s belief produces a corresponding trend toward the CEO’s decreasing risk-taking when the return like is revealed strongly. The results indicate that sunflower management as such is an important determinant in ensuring a safe insurance system. Originality/value This is the first paper to construct a contingent claim model to evaluate the expected value of the CEO’s utility function defined in terms of the equity returns and the equity risks of a life insurance company. The model explicitly considers CEO sunflower behavior, CEO spread behavior and the limited liability of shareholders.

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