Moral Hazard and Risk: Explain how financial institutions, such as banks, may suffer as a result of moral hazard and how might it be managed.

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Hou, Yuguo (2013) Moral Hazard and Risk: Explain how financial institutions, such as banks, may suffer as a result of moral hazard and how might it be managed. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

EXECUTIVE SUMMARY

This dissertation has researched the subject of moral hazard and excessive risk taking and their relation using Chinese Bank as the case study. Moral hazard refers to excessive risk taking by people who take large loans when they do not have the means to repay it but they pass on the risks to other parties. The research method used a mixed method approach with a case study and survey method for data gathering. A survey with 15 questions of multiple choice and Likert 5-point scale was administered to loan approval and finance officers of the bank. A semi-structured interview was also administered and respondents included senior bank managers. The objective was to assess how bank staff viewed moral hazard and excessive risk taking. The findings indicate that while generally, the bank observes safe method of checks and credit worthy evaluation of loan applicants, there are some instances when a small percentage of subprime cases are approved for loans. Moral hazards were seen among bank managers whose performance appraisal is based on the loans sanctioned, new accounts opened, etc. Customers also take advantage of the low interest and availability of easy loans to buy items they cannot pay for. This leads to possible moral hazards. Some recommendations have been made that include bringing stricter controls over credit norms, following banking regulations and safe accounting ratios. It is also recommended that bank managers should be appraised using different metrics.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 03 Mar 2015 11:17
Last Modified: 19 Oct 2017 13:10
URI: https://eprints.nottingham.ac.uk/id/eprint/25868

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