An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

Question

Quizplus · Accepted Answer

The creation of an international lender of last resort creates a moral hazard problem, as it leads to an increased likelihood of banks taking excessive risks, knowing that they will be bailed out in the event of a crisis. This expectation of protection also encourages depositors and other creditors to invest in risky or poorly managed banks, leading to potential instability in the financial system.

An International Lender of Last Resort Creates a Serious ________