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

The implicit assumption that governments will bailout financial institutions under distress can generate negative incentives for the development of a sound financial system. In the Brazilian case, 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. An eventual Central Bank bailout over public and private commercial banks was eliminated due to the end of hyper-inflation unter the Real Plan, that reduced the government's dependence upon those important political actors. (Rev Econ Pol/DÜI)