Question

As a result of the global Covid-19 pandemic and lockdown, central banks around the world have stepped in to provide massive liquidity to the capital markets. Among the key policies are to keep interest rates low or sub-zero (zero interest rate policy or ZIRP). Discuss the implication of such policies to credit risk management from the perspective of adverse selection and moral hazard.

(Please provide a 400 words explanation)

Answer 1

As result of covid 19 , there was lockdown which lead to shut down of production , people have migrated from one place to another.there was decline in money supply ,fall in output and rise of unemployement which ultimately lead to financial crisis there has been an implicit understanding , the government will come up for rescue.this means investor enterpreneur have greater incentive to take risk. If risk lead to higher profit they will be benefited. but if they are bankrupt then government will come to rescue. despite the problem of  moral hazard,the economic cost will be higher.