Bank examinations by the FDIC help reduce the ________ problem, by preventing bank managers from allocating funds already obtained from depositors to non-creditworthy loans.

Question

Quizplus · Accepted Answer

The moral hazard problem refers to the risk that an individual or entity will take on greater risk because they know they will not bear the full cost of the negative outcome. In the context of banking, this can occur when bank managers allocate funds to non-creditworthy loans, knowing that if those loans fail, the FDIC (and therefore taxpayers) will be responsible for covering the losses. Bank examinations by the FDIC can help prevent this problem by ensuring that banks are only making loans to creditworthy borrowers.

Bank Examinations by the FDIC Help Reduce the ________ Problem