To minimize the problem of moral hazard when making a loan, a bank requires borrowers to:
A)sign a covenant.
B)use their car as collateral.
C)make the bank the majority owner of the firm.
D)allow themselves to be monitored by the FDIC.

Question

Quizplus · Accepted Answer

Requiring borrowers to sign a covenant that outlines specific terms and conditions of the loan, including consequences for non-payment or unethical behavior, can help minimize the problem of moral hazard as borrowers are more likely to honor their obligations if they are legally bound by the terms of the agreement. Using collateral or making the bank the majority owner of the firm may also reduce the risk of moral hazard but may not be feasible for all borrowers. Allowing monitoring by the FDIC is not typically a requirement for individual borrowers and may not directly address the issue of moral hazard.

To Minimize the Problem of Moral Hazard When Making a Loan