Moral hazard in the banking system can occur because:
A) of high capital requirements.
B) financial regulations ensure banks are prudent.
C) banks rarely make risky bets.
D) of low return on assets.
E) of high leverage ratios.

Question

Quizplus · Accepted Answer

Moral hazard in the banking system can occur because of high leverage ratios. When banks have high leverage ratios, they have a higher likelihood of taking on risky investments because they have less of a financial cushion to fall back on. This can lead to moral hazard, as banks may take on more risk than they would if they had lower leverage ratios.

Moral Hazard in the Banking System Can Occur Because