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

Question

Quizplus · Accepted Answer

Adverse selection refers to the problem of asymmetric information where parties with private information can take advantage of those who lack this information. In the context of banking, it can refer to risk-prone entrepreneurs seeking to enter the industry, knowing that they can take on risky investments and potentially reap the rewards. By restricting asset holdings and conducting regular bank examinations, banks are indirectly reducing the opportunities for such entrepreneurs to engage in risky behavior, thus discouraging them from entering the industry.

Regular Bank Examinations and Restrictions on Asset Holdings Indirectly Help