As a result, in the absence of a strong system of bank supervision, banking institutions are encouraged to take on exposures that heighten systemic risk. To limit the moral hazard problem created by their acting as lenders of last resort, governments and institutions must make improved financial-sector supervision and regulation a high priority.
The usual elements of a well-functioning prudential regulatory and supervisory system are adequate disclosure and capital requirements, limits on currency  3  Frederic S. Mishkin, "Asymmetric Information and Financial Crises: A Historical Perspective," in R. Glenn Hubbard, ed., Financial Markets and Financial Crises (Chicago: University of Chicago Press, 1991), 69-108.