A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

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Requiring borrowers to keep compensating balances in a checking account at the bank allows the bank to monitor their check payment practices as they have access to their transaction history. It also provides the bank with a form of collateral to mitigate moral hazard. Placing a bank officer or corporate officer on the other's board of directors may not necessarily be effective in monitoring check payment practices. Doing all of the above may also be unnecessary and burdensome for the borrower.

A Bank That Wants to Monitor the Check Payment Practices