When banks take on too much risk with the hope that the Fed will eventually bail them out,a condition of _____ exists.
A) systemic risk
B) liquidity risk
C) a solvency crisis
D) moral hazard

Question

Quizplus · Accepted Answer

When banks take on too much risk with the expectation that the Fed will eventually bail them out, it creates a moral hazard. This means that the banks are incentivized to take on excessive risk knowing that they will not bear the full consequences of their actions, as they can rely on the Fed for support. This can lead to reckless behavior and ultimately, systemic risk in the financial system. Liquidity risk refers to the risk that a bank may not have enough cash or highly liquid assets to meet its obligations, while solvency crisis refers to a situation where a bank is unable to meet its long-term financial obligations.

When Banks Take on Too Much Risk with the Hope