Commercial banks limit the adverse selection problem through ________.

Question

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Commercial banks limit the adverse selection problem through screening, which involves evaluating the creditworthiness of potential borrowers before lending to them. This helps to ensure that loans are only extended to borrowers who are likely to repay them, reducing the bank's risk of losses from defaults. Monitoring and restrictive covenants are tools used to mitigate moral hazard, which is the risk that borrowers may take on excessive risk or engage in other behaviors that could harm the bank's interests.

Commercial Banks Limit the Adverse Selection Problem Through ________