The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.

Question

Quizplus · Accepted Answer

Regulatory forbearance refers to the practice of a regulator choosing not to strictly enforce regulations. In this case, regulators allowed savings and loans to take on increasing levels of risk in the hopes that they would be able to return to solvency. This created a situation where the institutions were more willing to engage in risky behavior (moral hazard) because they believed the government would bail them out in the case of failure. Adverse selection refers to the idea that those who are most likely to default on a loan or engage in risky behavior are the most likely to seek out and receive a loan. While this may have been a contributing factor, it is not as directly related to the policy of regulatory forbearance as moral hazard. Therefore, the answer is A.

The Policy of ________ Exacerbated ________ Problems as Savings and Loans

The Policy of Exacerbated Problems as Savings and Loans