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An economist from a central bank is presenting at a banking conference on the characteristics of deposit insurance and the effect on the overall risk profile of the banking system. During the presentation, the economist mentions that using deposit insurance might increase moral hazard risk. Which of the following examples can the economist use to illustrate a moral hazard?
A
A bank increases amount of equity capital it is holding to cover potential losses calculated at 99.9%.
B
A bank collects large amounts of deposits and reinvests those funds into risky high-yield bonds instead of high-quality bonds with lower returns.
C
A bank pays risk-based deposit insurance premiums on all its capital regardless of the amount of interest paid to depositors.
D
A bank decreases the interest rates it pays to depositors to compensate for deposit insurance premiums.