Deposit insurance contracts can be structured to reduce moral hazard behavior by

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Deposit insurance contracts can be structured to reduce moral hazard behavior by increasing depositor discipline through higher deductibles or co-insurance, increasing stockholder discipline by imposing capital requirements and shareholder liability, increasing regulator discipline by monitoring and supervising banks, and reducing owner incentives to take risks through restrictions on executive compensation and dividend payouts. Thus, all of the above options can help reduce moral hazard behavior.

Deposit Insurance Contracts Can Be Structured to Reduce Moral Hazard