2. Describe the adverse selection and moral hazard problems that existed during the 2009 euro crisis. (approximately 2 double-spaced pages; 10 points) Moral Hazard In 1997, the Eurozone rules of the Stability and Growth Pact outlined budgetary discipline to reduce moral hazard and the problem of free riding. It required all Eurozone nations to limit their annual deficits and maintain stable economic growth. In particular, saving is not permitted. However, some countries never respected the debt rules from the beginning, while others gradually broke them, with incentives to take advantage of alliances and achieve their own development. alliance for granted, so much so that they engage in excessive lending and borrowing. They thought the Euro alliance was a huge “too big to fail” safety net, so much so that it seemed less expensive in terms of risk taking. When all Eurozone nations did the math and behaved the same way, heavy debt and deep insolvency accumulated into a major crisis. 【二】20Moreover, corruption also existed in the Euroalliance. The transparency of regulation is questionable. As I said before, rule breaking has been an ongoing problem, but no one has been penalized for this offense. Poor monitoring by Euro regulators has connived at the problem of moral hazard and free riding. University of Toronto. 04, 2016, ppt8【二】 G. Georgopoulos “debt lesson on the euro crisis.pdf”. University of Toronto. 04, 2016, ppt20Adverse SelectionWhen risk-loving investors or investors with poor credit are selected for loans, an adverse selection problem occurs. In the event of a euro crisis, risk-loving investors tended to take advantage of other p...... paper ......page sold; 10 points) No, abandoning capital (safety) in exchange for profitability is not what regulators want. Regulators care more about the well-being of bank owners and the banking system. As I said before, there is a trade-off between safety and profitability. Holding too much less capital will significantly increase the bank's risk of debt default. A certain amount of capital is needed to act as a buffer for the bank against potential defaults and crises. [c] [a] Frederics S, Mishikin and Apostolos Serletis. "Chapter 13: Banking and the management of financial institutions" The economics of money, banking and the financial market. 5th Canadian. Pearson, 305. Print.【b】Frederics S, Mishikin and Apostolos Serletis. "Chapter 13: Banking and the management of financial institutions" The economics of money, banking and the financial market. 5th Canadian. Pearson, 306. Print.[c]Ibid