An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

Question

Quizplus · Accepted Answer

Depositors and creditors expect that they will be protected if a crisis occurs because they know that an international lender of last resort will step in to bail out the banks. This creates a moral hazard problem whereby the banks are more likely to take on excessive risk since they know they will be bailed out if they fail.

An International Lender of Last Resort Creates a Serious Moral