In simple terms, this quote highlights a situation where a bank has an interest in making risky loans but prefers to do so with funds from other sources rather than its own capital. Essentially, it means that banks have more incentive to take on risk when they can use borrowed money instead of their own resources.
The deeper meaning of the statement touches upon the inherent conflicts within financial institutions and the broader implications for economic stability. When banks make risky loans using borrowed funds—a practice known as leveraging—they are amplifying both potential gains and losses. This approach increases the bank’s exposure to risk but also boosts its profit margins if the investments pay off. Such practices can create systemic risks, especially when multiple institutions engage in highly leveraged lending. The quote suggests that without proper regulation or oversight, banks might be inclined to take on excessive risks at the expense of long-term stability and customer trust.
Eric Maskin is a renowned American economist known for his significant contributions to game theory, which earned him part of the Nobel Memorial Prize in Economic Sciences in 2007. His expertise spans various areas of economics, including welfare economics and social choice theory, and he is celebrated for his insightful analyses that often highlight the complexities within financial systems and markets.
