Answer:
By allowing the loans to the less creditworthy borrowers than this situation poses a moral hazard.
Explanation:
Moral hazard can be defined as a situation where one party ( who is insured ) takes more risks, which it has protection against, and the other party would be bear the risk.
In the given situation, a manager who sees that there is increase in federal deposit insurance coverage , has directed the loan officers to provide loans to the less creditworthy borrowers , now this decision of his poses a moral hazard because manager knows that by providing loan to such people, there are high chances of default on these loans and here manager is acting in a much more riskier way than he should be.
