Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party (in this case, bank owners) is insulated from the negative consequences of their actions (such as bank failures). This can lead them to take greater risks with their assets in order to potentially gain larger profits, as they do not bear the full cost of any losses.

Moral Hazard Provides an Incentive for Bank Owners to Accept