Question

Which of the following most accurately describes the concept of 'Moral Hazard' in the context of banking and financial systems?

Q: Answer-Which of the following most accurately describes the concept of 'Moral Hazard' in the context of ban...

Moral Hazard arises when a party is insulated from the full consequences of its decisions creating an incentive to take on greater risk. In banking 1 Deposit insurance reduces depositor incentive to monitor bank risk-taking 2 Too-big-to-fail institutions may accept excessive risks knowing they will be bailed out by the government 3 Borrowers may use loan proceeds for riskier purposes than declared, once funds are disbursed. Option D describes concentration risk or herd behaviour. Option E describes regulatory capture. Both are distinct concepts.

A The risk that bank employees will behave unethically when their conduct is not directly supervised

B The risk that a depositor will withdraw savings without notice, causing a bank run

C The tendency of a party that is protected from the consequences of its actions to behave differently typically more recklessly than it would if fully exposed to those consequences

D The systemic risk arising when all banks hold similar asset portfolios and are simultaneously affected by the same shock

E The risk that a regulator becomes excessively influenced by the industry it is supposed to regulate

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