Note 2-8

8 There are opposing views as to how a decline in banks' capital adequacy ratio would affect banks' attitude toward risks. Some argue that banks would become unable to take risks due to the disappearance of the buffer. Others argue that, under the situations such as those in the first half of the 1990s, when disclosure of detailed financial information was not required, the management of banks in critical financial conditions would extend loans to risky borrowers. However, now that the requirements for disclosure of financial information, such as those on non-performing loans, and frameworks, such as the Prompt Correction Action, are in place, we are not likely to see activities with scope for managerial moral hazard. Besides, that banks are unable to take risks is due in part to the fact that they are unable to set interest rates at a level corresponding to risks involved due to the deterioration of the economic situation.