One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

Question

Quizplus · Accepted Answer

The too-big-to-fail policy creates an expectation that the government will bail out large banks in case of a financial crisis, which reduces the perceived risk of failure for these banks. This, in turn, creates moral hazard, i.e., the incentive for banks to take greater risks since they expect to be bailed out if things go wrong. Therefore, the correct choice is B, which states that the too-big-to-fail policy increases the incentives for moral hazard by big banks.

One Problem of the Too-Big-To-Fail Policy Is That It ________