Question

Does the problem of moral hazard indicate that insolvent banks should not be rescued?justify your answer.

Answer 1

Insolvent banks made the conscious decision to take on riskier investments and practices, therefore they should suffer the consequences of those choices. The presence of moral hazard in the choices made by certain banks was passed down to its customers therefore the customer should not have to bear the responsibility of bailing out the bank and being adversely affected again.