Question

Many policymakers is developing countries have proposed implementing systems of deposit insurance like the one that exists in the United States. However, replicating the financial system from one nation may not be successful in other nations due to different economies, politics, histories, etc.

Deposit insurance is designed to ____ fears of bank run and therefore ____ confidence in banks and deposits.

However, because depositors may feel that the "safety net" of deposit insurance means they no longer need to supervise banks themselves, asymmetric information in the form of ____ may ____.

Answer 1

The answers are:

1. decrease; increase
2. moral hazard; increase

Step-by-step explanation:

When you deposit money in your bank account, you know that the money is safe ad even f the bank goes bankrupt, you will be able to get your money bank. That is exactly what deposit insurance does, it increases the public trust in banks.

But if bank customers feel too safe about deposit insurance, they might forget to look for the best bank possible to hold their savings. If it doesn't matter what bank you use to save money, since you are guaranteed to get your money back, you might choose any bank without even checking how its performing.