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19 April, 04:40

A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses

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  1. 19 April, 05:06
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    By allowing the loans to the less creditworthy borrowers than this situation poses a moral hazard.

    Explanation:

    Moral hazard can be defined as a situation where one party (who is insured) takes more risks, which it has protection against, and the other party would be bear the risk.

    In the given situation, a manager who sees that there is increase in federal deposit insurance coverage, has directed the loan officers to provide loans to the less creditworthy borrowers, now this decision of his poses a moral hazard because manager knows that by providing loan to such people, there are high chances of default on these loans and here manager is acting in a much more riskier way than he should be.
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