Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because,given fewer opportunities to take on risk,risk-prone entrepreneurs will be discouraged from entering the banking industry.

Question

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Adverse selection refers to the problem of asymmetric information where the riskier borrowers are more likely to seek loans from banks. By restricting asset holdings and conducting regular examinations, banks limit their capacity to take on risk. This indirectly reduces the adverse selection problem, as riskier borrowers are discouraged from seeking loans from the bank.

Regular Bank Examinations and Restrictions on Asset Holdings Help to Indirectly