Date of Award

6-2013

Document Type

Open Access

Degree Name

Bachelor of Arts

Department

Economics

Second Department

Political Science

First Advisor

Eshragh Motahar

Second Advisor

Mark Dallas

Language

English

Keywords

financial, government, hazard, moral, risk

Abstract

The US government has invested over $3 trillion in financial assistance programs and bailouts for ailing companies affected by the 2007-2009 financial crisis. This paper analyzes the different government policy efforts in response to the collapse of the U.S. financial sector and whether these efforts increased the risk of moral hazard for small, medium, and large banks. Moral hazard occurs when a company has an incentive to take greater risks than it otherwise would, because the company gains all the benefits from excessive risk-taking, but does not bear all of the losses. I measure moral hazard through the debt-to-equity ratio, interest rate spreads, and risk ratings on new loan originations for a select group of small, medium, and large banks. This paper is different from previous studies because I analyze the issues of public transparency, accountability and policy clarity during and after the financial crisis. This analysis is done in the context of the dynamic relationship between democratically elected government bodies of Congress and the Presidency and politically appointed bodies of the Federal Reserve and the U.S. Treasury. The results indicate that government policies preceding and during the financial crisis increased the risk of moral hazard on the part of large banks, but not for medium and small banks. In addition, the failure of government policy to establish a clear plan of action further exacerbated the issue of moral hazard. This suggests that ‘too-big-to-fail’ remains a systemic risk to the financial sector despite efforts to attenuate it.

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