Moral hazard occurs when:
A) the failure of one financial institution can bring down other institutions as well.
B) financial institutions take on too much risk because they are insured.
C) financial institutions become insolvent because they issued too many loans.
D) there are more short-term liabilities than short-term assets.

Question

Quizplus · Accepted Answer

Moral hazard occurs when there is a risk that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. In the case of financial institutions, if they are insured, they may take on too much risk because they assume that they are protected from financial losses.

Moral Hazard Occurs When