The concept of 'Moral Hazard' in the context of deposit insurance arises because:
A. Insurance always reduces risk-taking
B. Depositors become more careful about bank risk
C. Depositors monitor banks more intensively
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.
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