Question

Moral hazard can contribute to high bank leverage in all of the following ways EXCEPT:______

a. federal deposit insurance has reduced the incentive of depositors to monitor the behavior ofbank managers.
b. high bank leverage provides shareholders with a potential for a higher return on equity.
c. having high capital requirements.
d. bank managers are compensated in part on providing shareholders with high returns onequity.

Answer 1

Answer: C. having high capital requirements

Step-by-step explanation:

Moral hazard is a situation that occurs when one party does not act in good faith and then engages in risky behavior because it knows that he or she won't bear the consequence of the behavior but the other party will.

Moral hazard can contribute to high bank leverage when federal deposit insurance has reduced the incentive of depositors to monitor the behavior ofbank managers.

It can also occur when high bank leverage provides shareholders with a potential for a higher return on equity and when bank managers are compensated in part on providing shareholders with high returns onequity.

Therefore, the correct option is C "having high capital requirements".