Moral Hazard Can Contribute to High Bank Leverage in All

question 6

Multiple Choice

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

• A) having high capital requirements.
• B) bank managers are compensated in part on providing shareholders with high returns on equity.
• C) high bank leverage provides shareholders with a potential for a higher return on equity.
• D) federal deposit insurance has reduced the incentive of depositors to monitor the behavior of bank managers.

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Definitions:

Investment Turnover

An indicator of how effectively a corporation utilizes its assets to produce sales or income.

Return On Investment

A profitability measure that calculates the return of an investment relative to its cost.

Profit Center

A division or segment of a company that is responsible for generating its own revenue and profit.

Residual Income

The income that remains after all personal debts and expenses have been paid, or in business, after all capital costs are deducted from net revenues.