Requiring collateral reduces the probability of default by making high-risk borrowers less likely to apply for a loan, which reduces:
A)adverse selection.
B)moral hazard.
C)interest rate risk.
D)bank panics.

Question

Quizplus · Accepted Answer

Requiring collateral acts as a signal to potential borrowers that the lender is serious about receiving payment on the loan. This can deter high-risk borrowers, who are more likely to default, from applying for the loan in the first place. This helps to reduce adverse selection, which is the problem of lenders attracting only high-risk borrowers who are more likely to default.

Requiring Collateral Reduces the Probability of Default by Making High-Risk