What term describes the situation where banks engage in risky loans expecting government bailouts?

The concept of moral hazard arises when one party is inclined to take risks because they do not have to bear the full consequences of those risks, often because they expect that someone else will cover the costs. In the context of banks making risky loans, moral hazard is at play if the banks believe that the government will bail them out if their risky investments fail. This expectation can lead banks to engage in behavior that they would not typically consider if they were fully on the hook for their losses, as the safety net provided by government bailouts creates an incentive to take on greater risks.

In contrast, adverse selection involves an imbalance of information in a transaction, where one party has more or better information than the other, leading to potentially undesirable outcomes. Systemic risk refers to the potential for a breakdown in an entire financial system or market, which may occur due to the interconnections between financial institutions, rather than the individual risk-taking behavior influenced by perceived safety nets. Credit risk, on the other hand, specifically refers to the risk of loss due to a borrower's failure to repay a loan, which does not directly involve the expectation of external bailout support.