Different regulatory regimes and banking crises - The role of moral hazard

Sammanfattning: Since 1988 there have been international attempts to regulate banks with the Basel Rules; despite these international efforts to regulate banks within the Basel Rules, the rules have been insufficient. The financial crisis of 2008 highlighted the importance of regulatory oversight in the banking sector. The crisis resulted in strengthened regulatory approaches worldwide, within the USA and Europe, adopting various liquidity and capital regulations to avoid future mistakes. Later on, bonus regulations were also implemented to avoid future extensive risk-taking. However, the recent bank crises, such as the collapse of SVB and other financial institutions, demonstrate that banking regulation is essential to prevent misconduct. For instance, in 2018, the American government decided to roll back the Dodd-Frank Act that was implemented after the financial crisis, which may have weakened the regulatory framework for the US banking sector and been a pivotal part of the new bank crises. This thesis explores how different approaches to regulating banks lead to different outcomes and how moral hazard affects these decisions. Through the theoretical framework of moral hazard, the thesis analyzes the impact of liquidity regulations and bonus caps on the behavior of banks in Europe and the United States. The study finds that the absence of a bonus cap in the US may increase the risk of moral hazard, as management teams and boards are more incentivized to take higher risks. In contrast, Europe's bonus cap system is designed to minimize the personal gain of taking chances on behalf of customers, stock owners, and taxpayers, therefore abstracting moral hazard from the calculation. Additionally, the study reflects on the impact of a risk-based regulatory approach and different liquidity regulations and how tighter liquidity regulations may reduce the risk of moral hazard, as they limit the ability of banks to engage in excessive risk-taking behavior. The study also shows what will occur if the authorities increase the liquidity regulations and implement more restrictions on the sector. Overall, the study contributes to the ongoing debate about the optimal regulatory approach for the banking sector and the effects of moral hazard.