Global Moral Hazard, Capital Account Liberalization and the “Overlending Syndrome”

July 1, 1999

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Eduardo Levy Yeyati. Global Moral Hazard, Capital Account Liberalization and the “Overlending Syndrome”, (USA: International Monetary Fund, 1999) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The removal of government guarantees in borrowing countries does not eliminate the moral hazard problem posed by the existence of deposit guarantees in lender countries. The paper shows that, after restrictions on international capital flows are lifted, banks in low-risk developed countries benefit from lending funds captured in home markets at low deposit rates to high-risk/high-yield projects in emerging economies, even though these projects command lower expected returns. This, in turn, has a negative impact on bank profitability in the borrowing country, even when foreign funds are intermediated through domestic banks. The results are consistent with the surge in international bank lending flows that led to recent banking crises in Asia.

Subject: Balance of payments, Banking, Capital account liberalization, Commercial banks, Deposit insurance, Deposit rates, Financial crises, Financial institutions, Financial sector policy and analysis, Financial services, Moral hazard

Keywords: Bank profit, Bank shareholder, Banking Crises, Capital account, Capital Account Liberalization, Commercial banks, Deposit Insurance, Deposit rates, High-yield project, Lender bank, Loan issue, Maximization problem, Moral Hazard, Risk profile, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/100
Stock No:

WPIEA1001999
ISBN:

9781451852387
ISSN:

1018-5941

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