Which of the following is a consequence of deposit insurance?
A) It may induce the officers of a bank to take more risks.
B) It encourages banks to make loans only to the most credit-worthy customers.
C) It minimizes the risk of defaulting on loans made to the bank's customers.
D) It encourages depositors to closely scrutinize a bank's lending activities.

Question

Quizplus · Accepted Answer

Deposit insurance protects depositors against losses if a bank fails. This reduces the risk that depositors will withdraw their deposits during times of economic uncertainty or if the bank's financial health is uncertain. As a result, the officers of a bank may be more willing to take risks because they know that even if the bank fails, depositors' money is insured by the government. This moral hazard problem is one of the criticisms of deposit insurance.

Which of the Following Is a Consequence of Deposit Insurance