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Rien ne va plus - The 2007/2008 Credit Crunch and what gambling Bankers had to do with it

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Hofmann, Anett (2009) Rien ne va plus - The 2007/2008 Credit Crunch and what gambling Bankers had to do with it. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.892).

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Abstract

The paper argues that the incidence of moral hazard played a significant role in the 2007/2008 credit crunch. In particular, bank traders subjected to asymmetric compensation structures have an incentive to take excessive risks even when the bank's shareholders would prefer prudent investment. Traders' incentives are shown to be unaffected by capital regulations, with the associated financial burden falling upon the taxpayer through deposit insurance or government bail-outs. Selected case studies further indicate that the phenomenon of “gambling traders” was widespread during the credit crunch, when high bonuses tempted bank employees to invest in risky subprime-backed securities. The intransparency of structured products and the inaccuracy of credit ratings contributed to the employees' ability to conceal the underlying risk from the banks' shareholders. The analysis points to an urgent need to reform compensation practices in the financial sector.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Global Financial Crisis, 2008-2009, Credit, Stock exchanges, Floor traders (Finance), Speculation
Series Name: Warwick economic research papers
Publisher: University of Warwick, Department of Economics
Place of Publication: Coventry
Official Date: 2009
Dates:
DateEvent
2009Published
Number: No.892
Number of Pages: 43
Status: Not Peer Reviewed
Access rights to Published version: Open Access
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URI: http://wrap.warwick.ac.uk/id/eprint/1325

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