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Eliminate the moral hazard problem completely

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Reference no: EM132953267

Many economists argue that a rescue of a financial institution should protect the institution's creditors from losses but NOT protect its owners: They should lose their equity. Supporters of this idea say that it reduces the moral hazard created by rescuers.

(i) Explain how this approach reduces moral hazard compared to a rescue that protects BOTH creditors and equity holders.

(ii) Does this approach eliminate the moral hazard problem completely? Please, explain.

Reference no: EM132953267

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