Moral hazard in the 2008 financial crisis

Abstract

Moral hazard refers to a situation where an actor takes excessive risks without bearing the consequences. It is particularly harmful in principal-agent relationships, where the agent exposes the principal to greater risk. Such patterns were evident in the financial system during the emergence and peak of the 2008 crisis. The aim of this paper is to model these interactions and assess the extent to which moral hazard contributed to the crisis, with emphasis on securitization, banks that are “too big to fail”, and conflicts of interest of credit rating agencies. The methodology involves three dynamic Bayesian game models: the relationship between lenders and borrowers, between investment banks and the state, and among banks, rating agencies, and investors. The conclusion is that, although moral hazard played a significant role, it was not the sole cause of the crisis. Combined with weak regulation and the complexity of the financial system, it highlights the need for deeper examination to prevent similar issues in the future.