How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

Question

Quizplus · Accepted Answer

Charging explicit deposit insurance premiums and implicit premiums on DIs would reduce the moral hazard in the absence of depositor discipline. This is because DIs would be incentivized to engage in safer practices as they would have to pay higher premiums for riskier behavior. Option A is incorrect as allowing DIs to undertake high-risk high-return asset investments would only exacerbate the moral hazard problem. Option B is also incorrect as basing deposit insurance premiums on a DI's deposit size would not necessarily incentivize DIs to engage in safe practices. Options D and E are also incorrect as they have the potential to exacerbate moral hazard rather than reduce it.

How Can the Regulators Reduce the Effects of Moral Hazard