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

Deposit insurance can lead to moral hazard, where managers take on riskier actions knowing deposits are insured (I), and depositors may not scrutinize financial stability due to the safety net provided by insurance (II).

Which of the Following Statements Is/are Correct? I