Knowing and Making

Some interesting research on banks, public guarantees and risk-taking (via the Alea blog ). The researchers use a natural experiment on German banks (some of whom lost the state guarantee on their deposits due to a court ruling in 2001). The research finds that these banks reduced the riskiness of their lending after the change (compared with a control group of other banks who didn't have a guarantee in the first place). This is what you would expect from conventional theory. But I wonder whether their conclusion is correct: "The results suggest that public guarantees may be associated with substantial moral hazard effects." An alternative view: perhaps banks without guarantees take less  risk than is socially optimal, and public guarantees partly correct for this effect. There are several reasons why this might be the case: Information asymmetry - the "market for lemons" argument. Businesses (and consumers) borrowing money have much more information abo...

Is Lloyds, as Robert Peston suggests , really acting on the instructions of its shareholders in trying to withdraw from GAPS (the Government Asset Protection Scheme)? Or is it, as seems more likely, trying to give its management more power? The EU and Treasury intervention that he refers to will restrict the freedom of Lloyds executives to hang onto the empire they've built; and incidentally, to set their own pay and credit policies. Selling off the Halifax branches might well be in the interest of Lloyds shareholders if not in the interests of the board. What's more: if the government does wish to make more credit available to UK businesses and consumers, one way to do it is to make sure banks have lots of capital available to support lending. If Lloyds really can raise £20 billion of new capital, wouldn't it be better if that can support £100 billion of new lending, rather than just replacing the GAPS scheme without increasing loan capacity at all? With the economy in th...