Moral hazard

The tendency to take more risk when someone else bears the cost of losses. Insurance and implicit bailouts are common sources.

Where you will meet it

Moral hazard comes up in 10 learning outcome notes across the FRM syllabus. A few of them:

• Banks
  FRM Part I · Financial markets and products

  “Moral hazard arises when protection from the consequences of risk leads to more risk taking.”

• Learning from Financial Disasters
  FRM Part I · Foundations of risk management

  “Savings and loans: duration mismatch and moral hazard.”

• Operational Risk
  FRM Part I · Valuation and risk models

  “Moral hazard arises after the policy is bought: a protected firm has less incentive to maintain controls or take care, so losses rise.”

• Derivatives
  FRM Part II · Credit risk measurement and management

  “Drawbacks are concentration of risk in a few CCPs, procyclical margin, moral hazard from mutualisation, and fragmented netting across CCPs.”

All terms beginning with M · FRM glossary

GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.