Which of the following statements is/are correct? I. Depository institution managers undertake riskier actions than they otherwise would because of the existence of deposit insurance.
II) Because of the existence of deposit insurance, depositors in savings and loans and other banks have little incentive to investigate the financial stability of these institutions.

Question

Quizplus · Accepted Answer

Both statements are correct. Statement I is true because deposit insurance can lead to moral hazard, where depository institution managers might take on riskier investments or actions, knowing that deposits are insured. Statement II is accurate because deposit insurance reduces the incentive for depositors to scrutinize the financial health of banks or savings and loans, as their deposits are protected up to a certain limit.

Which of the Following Statements Is/are Correct? I