Final answer:
A bank hold harmless agreement is an example of contractual transfer, which transfers the risk from the bank to another party. Moral hazard arises in banking when protected entities, like those with deposit insurance, engage in riskier behavior because they feel safeguarded from the consequences.
Step-by-step explanation:
A bank hold harmless agreement against consequential damages from a misdirected wire transfer is an example of contractual transfer. This is a risk management technique where risk is shifted from one party to another through a contract. In this case, the bank is transferring the risk of any potential consequential damages from a misdirected wire transfer to the other party, usually the customer initiating the transfer.
The concept of moral hazard applies to deposit insurance and other bank regulations as it may encourage banks to take on riskier investments and operational decisions. Since deposit insurance protects depositors' funds, banks might feel more secure to engage in riskier behavior, knowing that customers' deposits are insured. Similarly, with certain regulations in place that protect banks in different scenarios, there can be a reduction in the incentive for banks to exercise utmost caution and due diligence.