Central banking reform and overcoming the moral hazard problem : the case of Brasil
By: SOLA, Lourder
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Contributor(s): GARAMAN, Christopher da Cunha Bueno | MARQUES, Moisés S.
Material type: 
ArticlePublisher: São Paulo : Editora 34, jul./set./2001Revista de Economia Política = Brazilian Journal of Political Economy 21, 3, p. 40-64Abstract: The implicit assumption that governments will bailout financial institutuons under distress can generate negative incentives for the development of a sound financial system. This paper begins from the premise that these negative incentives, which create a situation of moral bazard, is essentially a political problem rather than a technical problem over generating correct institutional incentives. In the brazilian case, we argue the current administration of Fernando Henrique Cardoso was only able to significantly reduce its moral bazard problem in the financial sector through distancing its political relationship with two important political actors: the private financial state governors. The ability of the government to eliminate the implicit assumption of an eventual Central Bank bailout over public and private commiercial banks was only made possible through a series of political conditions, which includes the end of hvper-inflation under the Real Plan, that reduced the government's dependence upon those two important political actors
The implicit assumption that governments will bailout financial institutuons under distress can generate negative incentives for the development of a sound financial system. This paper begins from the premise that these negative incentives, which create a situation of moral bazard, is essentially a political problem rather than a technical problem over generating correct institutional incentives. In the brazilian case, we argue the current administration of Fernando Henrique Cardoso was only able to significantly reduce its moral bazard problem in the financial sector through distancing its political relationship with two important political actors: the private financial state governors. The ability of the government to eliminate the implicit assumption of an eventual Central Bank bailout over public and private commiercial banks was only made possible through a series of political conditions, which includes the end of hvper-inflation under the Real Plan, that reduced the government's dependence upon those two important political actors
Revista de Economia Política 2001
v. 21, n. 3(83)
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