When it acts as a lender of last resort,the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard.

Question

Quizplus · Accepted Answer

When financial institutions know that they can rely on the IMF to provide liquidity in times of crisis, they may take greater risks than they would otherwise, knowing that the IMF will be there to bail them out if necessary. This is known as moral hazard. Therefore, the IMF's role as a lender of last resort may increase the likelihood of moral hazard.

When It Acts as a Lender of Last Resort,the IMF