19-16 The risk of moral hazard increases when capital levels are low.

Question

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When capital levels are low, banks may be more likely to take excessive risks or engage in behavior that could lead to a financial crisis because they have limited resources to absorb losses. This can lead to moral hazard, where banks may feel that the government or other institutions will bail them out if they encounter financial difficulties. Thus, the risk of moral hazard increases when capital levels are low.

19-16 the Risk of Moral Hazard Increases When Capital Levels