Deposit insurance contracts can be structured to reduce moral hazard behavior by

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All the options can play a role in structuring deposit insurance contracts to reduce moral hazard. Increasing depositor discipline by requiring higher levels of capital and providing transparency in bank operations can encourage depositors to make more informed decisions about where to put their money. Increasing stockholder discipline by requiring higher levels of capital, monitoring bank operations, and setting compensation structures that align with long-term bank performance can encourage stockholders to be more careful about the risks banks take. Similarly, increasing regulator discipline through stronger oversight and enforcement actions can also help deter risky behavior. Finally, reducing owner incentives to take risks by requiring higher levels of capital, setting compensation structures that align with long-term bank performance, and imposing penalties or restrictions on the use of insured deposits can all help reduce moral hazard behavior.

Deposit Insurance Contracts Can Be Structured to Reduce Moral Hazard