moral hazard

noun

plural moral hazards

: a situation in which a party is incentivized to risk causing harm because another party is obligated to remedy the consequences of the harm caused

Patricia A. McCoy, a professor at Boston College of Law, said that during the financial crisis of 2008, the cap on deposit insurance was lifted under the Transaction Account Guarantee Program for most banks, and the suspension remained in place until the end of 2010. … Ms. McCoy said regulators and lawmakers need to be careful about permanently raising or eliminating the deposit cap as it can encourage unnecessary risk taking. "Every time this happens it increases the potential for moral hazard going forward," Ms. McCoy said.

—Matthew Goldstein

specifically : the possibility of loss to an insurance company arising from the character or circumstances of the insured

Examples of moral hazard in a Sentence

Recent Examples on the Web

These are two independent points, the scientific phenomenon of accessible DNA testing and the moral hazard of hiding a person from her family. —Carolyn Hax, Washington Post, 28 Jan. 2024

Why did the government apparently throw out concerns about moral hazard when SVB failed? —Cassandra Jones Havard, Fortune, 21 Mar. 2023

Excessive capital requirements would harm smaller banks more than larger ones, while reducing the demand for liquidity by increasing the amount of deposit insurance would create serious moral hazard. Solving such a complex problem requires a fresh look at deposit insurance. —Thomas D. Lehrman and Randal K. Quarles, WSJ, 13 Dec. 2023

And the moral hazard remains of profligate countries in the zone piggybacking on frugal ones. —Iese Business School, Forbes, 29 Nov. 2023

The cost-benefit equation doesn’t account for moral hazard, either. —Daniel A. Gross, The New Yorker, 5 Nov. 2023

Meanwhile, recent world events are mitigating the concerns about moral hazard that, up to now, have discouraged even research into geoengineering. —Robert Litan, Foreign Affairs, 26 Oct. 2022

In the long run, the moral hazard effects of the new IDR plan will be more consequential than the one-time student loan forgiveness which the Supreme Court struck down. —Preston Cooper, Forbes, 17 July 2023

But these government rescues at the very least create moral hazard, and at worst don’t work. —Justin Muzinich, WSJ, 1 Mar. 2023

Word History

First Known Use

1861, in the meaning defined above

Legal Definition

moral hazard

noun

1

: the possibility of loss to an insurance company (as by arson) arising from the character or circumstances of the insured

deductibles decrease moral hazard

2

: the likelihood of investors to take greater risks because of the knowledge that losses incurred as a result of those risks will be covered by another (as a government)