When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called ________.
A) deflation
B) releveraging
C) capitulation
D) deleveraging

Question

Quizplus · Accepted Answer

When the value of loans held by financial institutions decreases, their net worth also decreases. As a result, they cut back on lending in order to reduce their risk exposure and improve their financial position. This process is known as deleveraging.

When the Value of Loans Begins to Drop, the Net