Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

Question

Quizplus · Accepted Answer

Requiring higher capital ratios increases a bank's net worth, which reduces the likelihood of insolvency and decreases the moral-hazard risk-taking incentives. Therefore, it is true that higher capital ratios can reduce incentives to take excessive risk.

Requiring Higher Capital Ratios Often Is Proposed as Method to Reduce