When risk-taking is not actuarially fairly priced into deposit insurance premiums

Question

Quizplus · Accepted Answer

When risk-taking is not actuarially fairly priced into deposit insurance premiums, there is an increase in the incentives for owners of DIs to take additional risk. In other words, they may be more likely to engage in risky behavior because they are not bearing the full cost of that risk. This can lead to a higher likelihood of financial instability for the DI and puts depositor funds at risk.

When Risk-Taking Is Not Actuarially Fairly Priced into Deposit Insurance