In general, effective government oversight of individual institutions increases financial resilience and reduces moral hazard by attempting to ensure that all financial firms with access to some sort of federal safety net--including those that creditors may believe are too big to fail--maintain adequate buffers of capital and liquidity and develop comprehensive approaches to risk and liquidity management.
The regulators failed to regulate the economy that is why you had a crisis and when you had crisis then they had to keep the financial institutions alive in order to prevent the total big round and this creates what is called a moral hazard which allows the financial institutions to indulge in excessive lending and excessive profits and excessive stimulation.
Indeed, an expectation by financial market participants that financial crises will never occur would create its own form of moral hazard and encourage behavior that would make financial crises more, rather than less, likely.
The time to worry about moral hazard is between financial crises, when policy makers have an opportunity to change the incentives of the financial system.
In this regard, some particularly thorny issues are raised by the existence of financial institutions that may be perceived as "too big to fail" and the moral hazard issues that may arise when governments intervene in a financial crisis.
Financial support without conditions attached would increase the risk of moral hazard.
CNN: This monetary body would limit Crisis spillover effects
They are a walking, talking, screaming moral hazard that's been in the American financial system for 70 years because they are exactly what I described - a private company that gets the benefit of any risks, but the government, for 70 years, has told the world - like you said, with a wink and a nudge - we're going to take care of them if anything bad happens.
Mr. Obama has at last joined the most important policy discussion: How to eliminate the moral hazard now embedded in the U.S. financial system.
The Fed minutes from 2007 reveal that members of the Federal Open Market Committee began to struggle to find a middle ground between action that was internationalist enough to ward off a systemic financial collapse on the one hand, and Lassie-Faire enough to avoid moral hazard on the other.
Some of the new financial instruments also confront investors with a problem largely absent from traditional asset-backed securities: moral hazard.
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