Deposit insurance can indeed reduce the likelihood of bank runs by assuring depositors their money is safe, but it can also lead to moral hazard where banks might engage in riskier lending practices, knowing that deposits are insured. This can erode the safety and soundness of the banking system over time.

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Deposit Insurance

Question 94

Multiple Choice

Deposit insurance

A) eliminated bank runs.
B) gave banks a greater incentive to make riskier loans.
C) led to dormant erosion of safety.
D) All of the above are correct.

Correct Answer: