Moral hazard is a problem in providing deposit insurance because insured banks are

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Moral hazard arises when insured banks are encouraged to take on more risk than they would if they were uninsured because they are protected by deposit insurance. The bank managers have little incentive to carefully manage risks since they know that the government will protect their customers in case of default. As a result, they might engage in riskier activities, which could result in more losses for the deposit insurance fund.

Moral Hazard Is a Problem in Providing Deposit Insurance Because