The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

Question

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This statement is true. Bankruptcy risk transference occurs when a bank recommends the issuance of debt securities to a financially struggling firm with the intention of reducing their exposure to the firm's default risk. This may result in the firm taking on more debt and potentially increasing their bankruptcy risk.

The Conflict of Interest That Occurs When a Bank Suggests