The moral hazard problem is minimized when deposit insurance premiums are

Question

Quizplus · Accepted Answer

Setting deposit insurance premiums based on a bank's risk profile creates a greater incentive for banks to engage in safe practices, as it discourages riskier behavior that could lead to larger payouts from the FDIC. This helps to minimize the moral hazard problem, where banks may take on more risk than they otherwise would if they know they are insured by the government. Option A is incorrect, as zero premiums would create a complete moral hazard problem, with no disincentive for risky behavior. Option B does not differentiate between banks with different levels of risk. Option C may or may not be effective, depending on whether small banks can still engage in risky behavior without fear of consequences.

The Moral Hazard Problem Is Minimized When Deposit Insurance Premiums