The Australian points to this report by OECD Financial Affairs Division Head, Sebastian Schich. It is an overview of deposit insurance schemes but The Australian seized upon its concerns about the potential for ‘moral hazard.’ Here is what the report said:
Deposit insurance can give rise to moral hazard both on the part of depositors, who may reduce their monitoring and “policing” efforts, as well as on the part of banks, which may perceive the lessening of the threat of market discipline.
As I have written before, moral hazard occurs when an action reduces incentives for something. In this case, do we really think depositors in Australia monitored or policed bank solvency prior to the guarantee? Do we really think bank managers will be less punished if their institution goes under now rather than prior to the guarantee? And shareholders will pay up regardless. This is hardly moral hazard.
There is more of an issue about wholesale banking and banks monitoring one another (but that is not actually discussed in the report) and the report raises concerns about being unable to tweak schemes to address that. I am less pessimistic about that. But once again we have glib throwing around this economic term.