Banks help mitigate the problem of moral hazard in lending by:
A) requiring lengthy applications for loans.
B) making loans to many different types of borrowers.
C) adjusting the amount of the loan to fit the requirements of the borrower.
D) monitoring the business after a loan is made to the business.

Question

Quizplus · Accepted Answer

Monitoring the business after a loan is made helps to ensure that the borrower is using the funds appropriately and reduces the likelihood of the borrower taking excessive risks or engaging in fraudulent activities. This helps to mitigate the problem of moral hazard, where borrowers may take on excessive risk knowing that the lender will bear the consequences. The other options may help with assessing the creditworthiness of the borrower, but they do not address moral hazard directly.

Banks Help Mitigate the Problem of Moral Hazard in Lending