The purpose of this article is an analysis of moral hazard in banks` credit activity (especially connected with a process of credit risk transfer). The other aim concentrates on proposals of quantification and management of moral hazard. Apart from this the article focuses on identification of relation between moral hazard and financial stability. The analysis of features of moral hazard, its reasons and potential consequences allows drawing conclusions referring to solutions which reduce a scale of moral hazard simultaneously maintaining mechanisms of financial market stabilization. Existence of moral hazard is a kind of paradox stating that individual and institutional care of stability in fact changes behaviour of entities being subject to potential bailout so that they become a kind of an accelerator of an increase of financial instability risk. In this context moral hazard is at the same time reason and effect of financial instability. That is why it is needed to find a consensus between initiatives aiming at strengthening of financial stability and escalation of moral hazard.

Keywords: moral hazard, credit risk transfer, economics of information
JEL: G21, G28, G32

 Paweł Niedziółka - Moral Hazard in Banks' Credit Activity and Financial Stability - plik pdf; (343 KB)