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In lending, the agency problem causes moral hazard when the agent bank cannot observe the actions...

In lending, the agency problem causes moral hazard when the agent bank cannot observe the actions of the borrower.

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An agent bank is an agent to the principal bank or a group of principal banks also known as a syndicate. As such the principal - agent relationship is between the principal bank and the agent bank. When the agent bank is unable to observe the actions of the principal bank, there can arise agency conflicts as the monitoring is an essential component of bank relationship. This would mean that there is a probability of moral hazard in agent bank extending credit to the original borrower of the principal bank who lacks a good repayment record.

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