The concept of 'Moral Hazard' in the context of deposit insurance arises because:
A. Depositors monitor banks more intensively
B. Depositors become more careful about bank risk
C. Insurance always reduces risk-taking
D. Banks may take excessive risks knowing that deposits are insured
Answer: Option D
Solution (By JKSSB Mock Tests)
Deposit insurance can create moral hazard by reducing depositors’ incentive to monitor banks and by encouraging banks to take greater risks because the downside is partly borne by the insurer.
No comments yet. Be the first to start the discussion!