The existence of a lender of last resort creates moral hazard for bank managers because:
A) they have an incentive to take too much risk in their operations.
B) officials are likely to undervalue the bank's portfolio of assets.
C) they are less likely to apply for a direct loan from the central bank.
D) banks seek loans from the central bank only after exploring other options.

Question

Quizplus · Accepted Answer

The existence of a lender of last resort creates moral hazard for bank managers because they have an incentive to take too much risk in their operations, knowing that they can always rely on the central bank to bail them out if things go wrong. This can lead to excessive risk-taking and ultimately increase the likelihood of bank failures and financial instability.

The Existence of a Lender of Last Resort Creates Moral