A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

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Requiring borrowers to keep compensating balances in a checking account at the bank will provide the bank with a way to monitor their payment practices. By keeping balances in the account, the bank can easily see if there are any issues with the borrower's ability to pay their debts on time or if they have engaged in any risky behavior. This will help prevent moral hazard, as the bank will be able to identify potential problems and take action before they become too serious. Placing a bank officer on the borrower's board of directors would be a potential conflict of interest, while purchasing the bank's CDs would not necessarily provide any direct oversight of the borrower's payment practices.

A Bank That Wants to Monitor the Check Payment Practices