In the absence of regulation,banks would probably hold

Question

Quizplus · Accepted Answer

In the absence of regulation, banks have an incentive to hold too little capital in order to increase their return on equity. This can lead to a higher risk of bank failures and a destabilization of the financial system. Therefore, C is the best choice as it is the only option that reflects this potential outcome. A and B are incorrect as they suggest that banks would hold too much capital, which is not consistent with the incentive structure in the absence of regulation. D is also incorrect as it does not provide a relevant answer.

In the Absence of Regulation,banks Would Probably Hold