Which of the following is false?
A)Moral hazard refers to the reduction in market discipline that comes with the presence of a safety net to prevent losses. The presence of deposit insurance or the belief that regulators will take mitigating actions in the event of a financial crisis creates moral hazard.
B)Banks and other intermediaries are given an incentive to invest in riskier loans and investments because of deposit insurance.
C)Mega mergers in the financial services industry may lead to a moral hazard problem in the future if market participants believe that the resulting firms would be bailed out if they ran into serious problems.
D)The moral hazard problem also exists in international financial markets if participants believe that no one would bail out a country in crisis, thus reducing losses from what they otherwise would be.

Question

Quizplus · Accepted Answer

The moral hazard problem in international financial markets actually arises when participants believe that a country in crisis will be bailed out, not when they believe no one would bail out the country. This belief can lead to riskier behavior under the assumption that losses will be mitigated by external assistance.

Which of the Following Is False