Banks' Risk-Taking Behavior Could Impact Economy and Society Greatly
Banks may take too much risk because they can't be fully monitored by depositors. This can lead to risky lending decisions. However, entrepreneurs' limited liability can also make banks cautious in investing. The balance between risk-taking and caution depends on future bank profits and the social costs of bank failure. More competition doesn't necessarily mean more risk-taking by banks. When new banks enter the market, existing banks might become more careful in their decisions.