The moral hazard problem is minimized when deposit insurance premiums are

Question

Quizplus · Accepted Answer

Setting deposit insurance premiums based on the bank's risk level forces banks to internalize the risks they undertake. This encourages them to avoid high-risk activities, thereby minimizing the moral hazard problem. Option A is not practical as it would mean that deposit insurance is not available, while option B would not incentivize banks to manage their risk levels effectively. Option C assumes that small banks are inherently less risky, which may not always be the case.

The Moral Hazard Problem Is Minimized When Deposit Insurance Premiums