(Solved):Explain the moral hazard problem as it relates to deposit insurance. View Answer…

 

Question

Explain the moral hazard problem as it relates to deposit insurance.

 

EXPERT ANSWER

The major problem with moral hazard is, in a contract, either of the parties takes a high risk as it knows that the party will bear the outcomes.

Similarly, in the deposit insurances also, the insurees think that they are protected, and if they encounter any type of loss, it will be borne by the insurance companies. The insurees majorly

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