On Financial Moral Risk

Moral hazard, although often talked about, is still lack of theoretical discussions in both fields of ethics and economics. Such situation leads to a conundrum for both economic and financial management and herald for a brand new research topic. Solving for this problem is the foundation for healthy financial development, the nucleus to enhance core competence and internal energy of financial firms, and also an important guarantee for the national financial security and corporate risk prevention. In the sense of ethics, the study on moral hazard not only enriches the connotation, but also has important theoretical significance for the formation mechanism and development discipline of moralities, and the exploration on morality construction discipline.From the perspectives of ethics and economics, this paper gives a comprehensive analysis and intensive study on the issue of moral hazard in the field of finance.Firstly, for the aspects of finance, ethics, behavioral finance, economic ethics and financial moral hazard, this paper starts by introducing the background and origin of this research, gives a systematic review of current studies in domestic and foreign literature, covers the overall progress and main viewpoints of this area, and gives a theoretical and summative discussion.Secondly, this paper shows the relationship between finance and ethics. First of all, it discusses the ethical property of finance, covers the meaning and nature of finance from the perspective of ethics, and focuses on the financial endogenous ethics, including the morality of finance, currency and credit, and ethical property of finance. Then it analyzes the basic relation of financial ethics from the three main parties: financial individuals, financial institutions and financial system. It respectively studies the moral connotation of the financial exchange relationship, contract relationship (debt, principal and agency), and credit relationship.Thirdly, this paper studies the connotation of moral hazard from the aspect of ethics. Starting from the definition of risk, it clarifies the basic meaning of risk, provides the definition of financial risk, reviews the ethics and economics researches concerning moral hazard, concludes the real connotation of financial moral hazard, and analyzes the definition and connotation of financial moral hazard. Based on the analysis above, this paper discusses the fundamental characteristics of all kinds of financial moral hazards from the perspective of principal, category, and cause of the behavior, thoroughly grasping the essence of the financial moral hazard. For the principal of moral hazard, moral hazard is caused by human-beings, showing the properties of collusion, basic instinct and connectivity. From the perspective of existence, moral hazard is becoming more long term, showing properties of invisible financial value view, hidden motivation, accumulation, acceleration, and contagion. From the perspective of result, moral hazard is becoming more socialized, which means more disruptiveness, more non-transferable property, and more negative externalities.Fourthly, the categorization of financial moral hazards is preliminarily discussed. This paper starts from categorizing moral hazards from the perspective of ethics and information economics. From other perspectives of the financial market such as financial sectors, sources of risk, and ethical standards, financial moral hazards are preliminarily categorized. According to the ethical requirements, major hazardous activities against moral rules, such as dishonesty, unfairness, fakeness, distortion of duties, dishonor, disorder, etc., are all discussed in detail. Annotation, characteristic, and genre of all kinds of hazards are discussed, which paved the way for the identification methods of financial moral hazards.Fifthly, from different aspects of ethics, sociology, and economics, the origination of financial moral hazard is thoroughly discussed. First of all, Moral hazard is triggered by human nature of moral individuals. The existence of three contradictions, which are between selfishness of human beings and normative property of ethics, between insatiable human needs and limited natural resources, and between the limitations of human's knowledge and universalities of moral standards, leads to the results that human beings' material, spiritual and political requirement needs cannot be satisfied. Second, starting from the characteristics financial industry, fragility of finance is found to be the root of moral hazard, which is discussed from the perspectives of financial markets, fragility of credit, and the confliction of financial ethics. Last, the cause of financial institutions on moral hazard is discussed. Moral hazard could be systematically caused by institutional defects, mistakes, spatial and temporal variations, vagueness, lack of operability and execution. Moral hazard under power imbalances and institutional defects is also analyzed.Sixthly, the relationship between financial moral hazard and government financial regulation is discussed. At first, moral hazards within government policies, guarantee system and financial regulation institutions are analyzed. Then the sources of financial regulatory moral hazard are discussed from the perspective of both government characters and financial regulations.Seventhly, the avoidance and minimization of moral hazard, especially the avoidance of negative consequences, is an important issue faced by managers and equity holders. Starting from basic principles, specific methods and institutional routes, this paper sets out a moral hazard prevention system for the Chinese financial market. First, the basic principles for moral hazard prevention system are proposed as cost minimization, institutions humanization, methods legalization, frequent prevention awareness and the realization of "moral turn" in operational philosophy. "Three-joint-force" prevention model should be built, with the forced being "education- morality- self control", "system- incentive-attractiveness", and "discipline- regulation- binding force". Second, financial professional moral system should be built with financial professional moral conducts and behavior disciplines, evaluation, monitoring, and warning systems. Three, based on the building and improvements of win-win benefit mechanism, continuous incentive mechanism, human resources risk management mechanism, and discipline inspection and supervision system, construct a financial regulation system that is in line with modern financial ethic rules. Four, propose to set up national credit information system, credit operation and management system, and constraint system. Five, according to the realities of Chinese financial market, thoughts are provided on setting up compliance regulation framework, system, and culture building. Six, a financial disciplinary system is constructed on self-discipline organization ethic principles, organization system, professionalism, and psychological contract. At last, a set of reforming procedures of financial regulatory functioning and related system is suggested. Specific advices concerning financial industry market access, deposit insurance, capital control and closure are given to be used to curb moral hazards effectively.