When the government bails out large banks when the banks become unstable, it could lead to a
moral hazard problem in banking.

Question

Quizplus · Accepted Answer

Bailing out large banks can create a moral hazard problem because it creates an expectation that the government will intervene and save the bank if it faces financial troubles again in the future. This can lead banks to take more risks than they would otherwise, knowing that they will not bear the full consequences of their actions.

When the Government Bails Out Large Banks When the Banks