Which of the following is NOT a contractual mechanism used by FIs to control credit risks?
A)Diversifying across different types of risky borrowers.
B)Requiring higher interest rate spreads for higher risk borrowers.
C)Requiring more collateral for the bank over the assets of more risky borrowers.
D)Making lending decisions only in centralized locations.
E)Placing more restrictive covenants on the actions of more risky borrowers.

Question

Quizplus · Accepted Answer

Making lending decisions only in centralized locations is not a contractual mechanism used by FIs to control credit risks. It is instead a structural mechanism, as it involves limiting the decision-making authority to a central location, rather than allowing individual branches or loan officers to make lending decisions. Options A, B, C, and E all involve contractual mechanisms that can be used by FIs to control credit risks. Option A involves diversifying risk across different types of borrowers, while option B involves charging higher interest rates to compensate for higher risks. Option C involves requiring more collateral or security over the assets of riskier borrowers, while option E involves placing more restrictive covenants on the actions of riskier borrowers to limit their ability to default.

Which of the Following Is NOT a Contractual Mechanism Used