Why Does the Safety Net Created by Deposit Insurance Increase

question 70

Essay

Why does the safety net created by deposit insurance increase the adverse selection and moral hazard problems in banking? How do bank regulations attempt to overcome these problems?

---

Definitions:

Privately-Held Firms

Businesses whose ownership is private, meaning their shares are not traded on public stock exchanges.

Securities

Financial instruments that represent ownership positions in corporations (stocks), creditor relationships with corporations or governmental bodies (bonds), or rights to ownership as represented by an option.

General Public

Refers to the broader community or populace that is not specifically involved with a particular area of interest or occupation.

Money Market Securities

Short-term financial instruments, typically with high liquidity and very low risk, such as Treasury bills and commercial paper.