Deposit insurance contracts can be structured to reduce moral hazard behaviour by

Question

Quizplus · Accepted Answer

All of the options listed can contribute to reducing moral hazard behaviour. By increasing depositor discipline, depositors are more likely to evaluate the risk of the bank and avoid those that may be engaging in risky behaviour. Similarly, increasing stockholder discipline can lead to more responsible management decisions and reduce the likelihood of excessive risk-taking. Regulatory discipline can also promote greater compliance with regulatory requirements, which can reduce the risk of bank failure. Finally, reducing owner incentives to take risks can make it less tempting for owners to pursue risky strategies that could harm the bank and its depositors. Combining these approaches can be effective in reducing moral hazard and promoting a more stable banking system.

Deposit Insurance Contracts Can Be Structured to Reduce Moral Hazard