One justification for greater regulation of traditional commercial banks than of shadow banks is the:
A) lower amounts of capital and higher amounts of risky assets held at banks.
B) absence of economy-wide repercussions when shadow banks fail.
C) more limited opportunities for excessive risk-taking by shadow banks.
D) existence of government insurance of bank deposits.

Question

Quizplus · Accepted Answer

Traditional commercial banks are subject to greater regulation due to the existence of government insurance of bank deposits, which creates a moral hazard where banks may take on excessive risk knowing that their depositors are insured by the government. Shadow banks do not enjoy the same level of government insurance or explicit backing, thus reducing the risk of moral hazard and making greater regulation less necessary.

One Justification for Greater Regulation of Traditional Commercial Banks Than