The paper by Thomas F. Hellmann, Kevin C. Murdock, and Joseph E. Stiglitz explores the relationship between liberalization, moral hazard in banking, and prudential regulation. It argues that while capital requirements can induce prudent behavior in banks, they often lead to Pareto-inefficient outcomes. The authors suggest that deposit-rate controls, which increase franchise values, can help achieve Pareto-efficient outcomes by encouraging banks to invest prudently. They find that even if deposit-rate ceilings are not binding, they can still deter gambling behavior. The paper also discusses the historical context of banking crises and the role of prudential regulation, highlighting the need for a combination of capital requirements and deposit-rate controls to effectively manage moral hazard and promote financial stability.The paper by Thomas F. Hellmann, Kevin C. Murdock, and Joseph E. Stiglitz explores the relationship between liberalization, moral hazard in banking, and prudential regulation. It argues that while capital requirements can induce prudent behavior in banks, they often lead to Pareto-inefficient outcomes. The authors suggest that deposit-rate controls, which increase franchise values, can help achieve Pareto-efficient outcomes by encouraging banks to invest prudently. They find that even if deposit-rate ceilings are not binding, they can still deter gambling behavior. The paper also discusses the historical context of banking crises and the role of prudential regulation, highlighting the need for a combination of capital requirements and deposit-rate controls to effectively manage moral hazard and promote financial stability.