The decision by regulators during the S&L crisis to offer led to increasingly risky loan making because of the problem of .
A)forbearance; moral hazard
B)resurrection; adverse selection
C)forbearance adverse selection
D)floating; low security returns

Question

Quizplus · Accepted Answer

Regulators offered forbearance to S&L institutions by allowing them to delay recognizing losses on their bad loans. This created a moral hazard problem, as S&Ls were incentivized to take on increasingly risky loans knowing that the government would bail them out if they failed. This led to a cycle of risky loan making and eventual collapse of many S&L institutions.

The Decision by Regulators During the S&L Crisis to Offer