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2020 | OriginalPaper | Chapter

1. Why Banks Must Be Supervised?

Author : Damir Odak

Published in: A Political Economy of Banking Supervision

Publisher: Springer International Publishing

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Abstract

The banking provides the perfect breeding ground for the moral hazard. Banks create externalities called “financial or banking crises”. When crises occur, they cause immense damage to everyone. A critical feature of banking is its interconnectedness. It causes spread of the failure through the system and creates the “forest fire” effect. Control over the risks accepted by banks preserves financial stability. The financial stability is the precondition for economic growth and political stability. The market proves inefficient in achieving it. As a consequence, the government organises banking supervision. Fulfilment of the task requires the balanced regulation which keeps the banking system free enough to be competitive, while sufficiently restrained to prevent it from causing a mishap.

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Title: Why Banks Must Be Supervised?
Author: Damir Odak
Publisher: Springer International Publishing
Book: A Political Economy of Banking Supervision
Print ISBN: 978-3-030-48546-7

Electronic ISBN: 978-3-030-48547-4

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-48547-4_1