A long-term bank-borrower relationship can result in

Question

Quizplus · Accepted Answer

A long-term bank-borrower relationship can result in the reduction of moral hazard when a binding multi-period contract can be negotiated at the outset. Additionally, the borrower may have a lesser propensity to switch projects because they are being offered a subsidized loan after they repay their first period loan. This helps to solidify the relationship between the bank and the borrower. However, there is still a risk of asset substitution moral hazard, which can be mitigated through monitoring and appropriate loan covenants.

A Long-Term Bank-Borrower Relationship Can Result in