Banks perform essential economic functions, but they are risky. One of the important questions in financial policy is whether banks take risks that are excessive from the point of view of the economy as a whole.
This slideshow explores three of the main reasons why many economists believe that banks do take excessive risks: Contagion effects such as bank runs, moral hazard arising from deposit insurance and the too-big-to-fail doctrine, and agency problems that occur when financial executives have incentives to gamble with their shareholders' money.
This slideshow is designed for classroom presentation. Feel free to cut-and-paste it into your lecture or assign it as a supplementary reading to students.
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