Implicit government support for "too-big-to-fail" banks:
A) increases the scrutiny of the bank's risk by large corporate depositors.
B) reduces the risk faced by depositors with accounts less than $250,000.
C) reduces the risk faced by depositors with accounts exceeding $250,000.
D) reduces the moral hazard problem of insuring large banks.

Question

Quizplus · Accepted Answer

Implicit government support for "too-big-to-fail" banks reduces the risk faced by depositors with accounts exceeding $250,000. This is because they are less likely to lose their deposits in the event of a bank failure, as the government would likely step in to prevent the collapse of the bank. However, this also creates a moral hazard problem, as the banks may take on more risk knowing that they have this implicit support from the government. It does not increase the scrutiny of the bank's risk by large corporate depositors and does not reduce the moral hazard problem of insuring large banks.

Implicit Government Support for "Too-Big-To-Fail" Banks