Risk incentive problem
The risk incentive problem is in the financial sector is a problem of the incentive for borrowers to invest in very risky projects. The incentive is caused by the fact that in corporations liability is mostly limited to the company's assets. If the case occurs that these assets are almost completely used up, there is an incentive for the owner of the company to invest in too risky projects, since he has almost nothing to lose, but if he gains profits from the increase in equity.
This problem can be explained here using an example. In the initial situation there is a fortune of 80, which is financed from 20 EK and 60 FK. Now there is a choice between two possible projects A and B. The expected change in assets of project A is according to values in the balance sheets 4. The expected change in assets of project B is according to values in the balance sheets 0. So A is clearly the better project out of the Lender's perspective.
However, it looks different from the owner's point of view: He is not interested in the entire expected change in assets, but only in the expected change in equity. The expected change in equity in project A is 4. However, the expected change in equity in project B is 10. This is because the total loss of 40 can only be financed by the equity for half. The other 20 must be financed by the lender. So the owner will choose Project B, even though objectively it is riskier for the company as a whole.
Since lenders anticipate this risk, borrowers with poor creditworthiness or high risk of default usually have to accept poorer credit terms . This in turn offers an incentive to minimize the risk incentive for the owners of the company. The risk incentive can be limited by extending the company's liability, e.g. B. through private liability or guarantees from third parties. Another possibility of averting this would be a restriction on the disposal of the company's assets for the owner and thus access options for the lender. This would mean, for example, that the lender may sell the vehicle fleet in the event of bankruptcy. If the ratio of EK to FK falls below a critical limit, the lender can be granted rights such as termination rights or a say in investments. The insolvency code itself stipulates that in the event of over-indebtedness, the group of creditors takes over the management of the company.