Explanation:
Moral hazard occurs when a party has an incentive to take unusual risks because they are protected from the negative consequences. In this case, deposit insurance provides this protection, creating a moral hazard by encouraging banks to engage in riskier behavior knowing the FDIC covers depositors' losses.
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Q.96 An unwanted result of deposit insurance is that it can cause banks to engage in risky behavior in the knowledge that depositors are well insured by the Federal Deposit Insurance Corporation (FDIC). This is an example of:
A
Adverse selection
B
Moral hazard
C
Asymmetric information
D
Systemic risk
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