Disclaimer: The views expressed are not necessarily those of the Bank of England or the Financial Policy Committee. In the 2011 Wincott Lecture, the author sets out a number of structural factors that have led banks to take on too much risk. The combination of limited liability for equity holders, tax biases that favoured debt over equity, the likelihood that banks would not be allowed to fail, and performance targets linked to short‐term equity returns meant that neither debt nor equity holders had an incentive to constrain bank risk taking. A number of solutions are offered which would better align these incentives with the public good.
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