Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.

Question

Quizplus · Accepted Answer

Regulatory forbearance can actually increase moral hazard as it sends a signal to the S&Ls that they will not face consequences for risky behavior. This can lead to the operating but insolvent S&Ls taking more risks since they are less likely to face regulatory intervention.

Regulatory Forbearance Reduces Moral Hazard Because an Operating but Insolvent