2. Describe the problems of adverse selection and moral hazard that existed during the 2009 euro crisis. (approximately 2 double-spaced pages; 10 points) Moral hazard In 1997, the rules of the Stability and Growth Pact of the euro zone have defined budgetary discipline to reduce moral hazard and the free rider problem. . It demanded that all eurozone countries limit their annual deficit and maintain stable economic growth. In particular, no rescue plan is authorized. However, some countries have never respected the debt rules from the very beginning, while others have gradually broken the rules, with incentives to take advantage of alliances and achieve their own development. alliance for granted, so they engaged in excessive borrowing and lending. They thought the Euro alliance was a huge safety net that was “too big to fail,” so it seemed less costly for risk-taking. When all countries in the Eurozone counted and behaved the same, heavy debt and deep insolvency accumulated to give rise to a great crisis. 【二】20Furthermore, corruption existed within the European alliance. Regulatory transparency is questionable. As I mentioned before, breaking the rules was a constant problem, but no one was penalized for this infraction. Poor oversight by eurozone regulators has fostered moral hazard and the problem of free riding. 【一】 G. Georgopoulos “Euro Crisis Debt Lecture.pdf”. University of Toronto. 04, 2016, ppt8【二】 G. Georgopoulos “debt conference on the euro crisis.pdf”. University of Toronto. 04, 2016, ppt20Adverse SelectionWhen risk-loving investors or investors with poor credit have been selected for loans, an adverse selection problem occurs. In the event of a euro crisis, risk-loving investors tended to take advantages over the other p...... middle of paper ......page ceded; 10 points) No, giving up 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 mentioned before, there is a trade-off between security and cost-effectiveness. Holding too little capital will significantly increase the risk of bank debt insolvency. A certain amount of capital is required to serve as a buffer for the bank against potential defaults and crises. 【c】【a】Frederics S, Mishikin and Apostolos Serletis. "Chapter 13: Banking and management of financial institutions" Monetary, banking and financial economics. 5th Canadian. Pearson, 305. Print. 【b】Frederics S, Mishikin and Apostolos Serletis. "Chapter 13: Banking and management of financial institutions" Monetary, banking and financial economics. 5th Canadian. Pearson, 306. Print.[c]Ibid.