Relatively high levels of capital may reduce the moral hazard problem of manager/owners taking on greater risks for a depository insurance system in that:

Question

Quizplus · Accepted Answer

Relatively high levels of capital may reduce the moral hazard problem of managers taking on greater risks. This is because having a higher equity may encourage managers to make better investment decisions on behalf of shareholders, since shareholders have more to lose from bad decisions. Higher levels of capital could also increase incentives for insured depositors to monitor their depository institution, but it does not encourage managers to take greater risks.

Relatively High Levels of Capital May Reduce the Moral Hazard