Because deposit insurance may create incentives for a bank to take excessive risks at the expense of the insuring agency, there is a moral-hazard problem.

Question

Quizplus · Accepted Answer

Deposit insurance can lead to moral hazard because banks might engage in riskier behavior, knowing that their deposits are insured and thus believing that the insuring agency will bear the cost of any losses.

Because Deposit Insurance May Create Incentives for a Bank to Take