Central banking reform and overcoming the moral hazard problem: the case of Brazil

Vol. 21 No. 3 (2001)

Jul-Sep / 2001
Published July 1, 2001

How to Cite

Sola, Lourdes, Christopher da Cunha Bueno Garman, and Moisés S. Marques. 2001. “Central Banking Reform and Overcoming the Moral Hazard Problem: The Case of Brazil”. Brazilian Journal of Political Economy 21 (3):407-32. https://doi.org/10.1590/0101-31572001-1252.

Central banking reform and overcoming the moral hazard problem: the case of Brazil

Lourdes Sola
Department of Political Science, Universidade de São Paulo – USP, São Paulo/SP, Brasil.
Christopher da Cunha Bueno Garman
Doctoral Candidate, Universiry of California, San Diego, California, United States.
Moisés S. Marques
Doctoral Candidate, University of São Paulo – USP, São Paulo/SP, Brasil.
Brazilian Journal of Political Economy, Vol. 21 No. 3 (2001), Jul-Sep / 2001, Pages 407-432


The implicit assumption that governments will bailout financial institutions under distress can generate negative incentives for the development of a sound financial system. This paper begins from the premise that these negative incentives, which create a situation of moral hazard, is essentially a political problem rather than a technical problem over generating correct institutional incentives. In the Brazilian case, we argue the current administration of Fernando Henrique Cardoso was only able to significantly reduce its moral hazard problem in the financial sector through distancing its political relationship with two important political actors: the private financial sector and state governors. The ability of the government to eliminate the implicit assumption of an eventual Central Bank bailout over public and private commercial banks was only made possible through a series of political conditions, which includes the end of hyper-inflation under the Real Plan, that reduced the government’s dependence upon those two important political actors.

JEL Classification: E58; E44; G21; G28.

Keywords: Central Bank autonomy financial system banks moral hazard political economy