Aligning Bank's Risk Appetite to that of Depositors
Time and again, we come across situations where large banks incur huge losses due to some poor bets or lack of asset liability matching. As a result, we have unintended consequence of the financial economy pulling down the real economy and common people getting impacted due to no fault of theirs. An equity investor or a mutual fund investor has a reasonable idea of the risks involved in the markets. She understands that there are downside risks involved in equity or mutual fund investments. So it is safe to conclude that an equity investor(mf investor) is more risk taking than a bank depositor. A bank deposit holder is far less risk-taking when compared to an equity investor. However, we notice that depositors run into trouble to risk taking activities of their banks. One solution to this problem,(apart from stringent disclosure requirements, capital requirements and regulatory supervision) is to align a bank's risk profile with that of depositors' risk profile. So while makin