Final answer:
Moral hazard problems are least likely to become less important (option c) with the development of large, complex banking organizations because these firms can become too big to fail, have government safety nets extended to them (option b), and they typically have greater incentives to engage in riskier activities (option d).
Step-by-step explanation:
The question revolves around the consequences of financial consolidation and the growth of large, complex banking organizations. One of the least likely outcomes of this process is that moral hazard problems will become less important.
Here’s why:
- Financial consolidation often means that more financial institutions will be considered too big to fail, which can result in the extension of government safety nets, thereby actually increasing moral hazard issues. This is because institutions might take greater risks, knowing they may be bailed out.
- The government safety net being extended to cover nonbanking activities makes it more likely that these institutions will engage in riskier behavior with the belief that they have institutional support.
- Banks will have greater incentives and opportunities to take on more risk as they grow larger and more complex, looking for ways to maximize profits within the expanded organization. With increased size, the impact of failure also tends to rise, which can put pressure on governments to step in and prevent collapse.
Following these points, it’s apparent that moral hazard problems would likely increase rather than decrease with the development of large, complex banking organizations.