Moral hazard encourages the FI to take on more, rather than less, risk.

Question

Quizplus · Accepted Answer

Moral hazard occurs when a party insulated from risk behaves differently than it would if it were fully exposed to the risk. In the case of financial institutions (FIs), moral hazard can occur when FIs know that they may be bailed out by the government or have access to other forms of financial support. This can encourage them to take on more risk than they would if they were fully exposed to the consequences of their actions. Therefore, moral hazard can lead to FIs taking on more risk.

Moral Hazard Encourages the FI to Take on More, Rather