A run on finance companies – but not in the direction you’d expect
Posted October 24, 2008on:
So investors are “rushing” to finance companies to invest money. One of my economist friends just told me he tried to invest money in a finance company, just to be told that they were “over-subscribed”.
I have two concerns stemming from this:
- Moral hazard: Finance companies will invest in higher risk ventures to get the return – knowing that there downside is covered by the government.
- Bank funding: Given suggestions that banks may face a funding crisis, a movement of funds from banks to finance companies can’t be a good thing
I suspect that Bank’s decision to charge a premium based on the quality of investments will have some impact – however, is the premium high enough to solve these problems? I guess we will know once we see the new set of deposit rates that finance companies come out with.