How do banks manage credit risk?
What will be an ideal response?
Banks manage credit risk through diversification across borrowers, regions, and industries. Bank loan officers conduct credit-risk analysis by screening applicants to eliminate potentially bad risks. Banks also require borrowers to put up collateral in return for some loans. Banks may ration credit by limiting the amount of a loan or denying credit to a borrower at the current interest rate. Banks may keep track of whether borrowers are obeying restrictive covenants. Banks may establish long-term business relationships with a borrower in order to better monitor their activities.
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In the figure above, an increase in income would result in the budget line
A) making a parallel shift toward point a. B) making a parallel shift toward point c. C) becoming flatter. D) becoming steeper.
The following is an example of adverse selection
a. A majority of those applying for well paid jobs are well qualified b. More reckless drivers opt for cars with fewer safety devices c. Individuals living in less secure neighborhoods want to buy more insurance d. Individuals with a strong family history of heart diseases opt to buy less insurance