Moral hazard occurs when banks and other financial institutions:
A) hesitate to lend because of concern over excessive risk.
B) take on too much risk,hoping that the Fed and regulators will bail them out.
C) fail to maintain their assets exceeding the liabilities.
D) fail,then bring down other institutions in the system.

Question

Quizplus · Accepted Answer

Moral hazard occurs when banks take on too much risk because they believe that if they fail, the government or regulators will bail them out. This can lead to reckless behavior and an increase in systemic risk.

Moral Hazard Occurs When Banks and Other Financial Institutions