Question

Ways that banks try to avoid moral hazard include all of the following except Requiring the...

Ways that banks try to avoid moral hazard include all of the following except

Requiring the business to keep their checking account at the lending bank.

Require the businesses to get, if so desired, any new lending from the original lenders / investors.

Maintain collateral in the form of plant and equipment.

Allow the company to audit their business before the loan is made.

Monitor the activities of the company.
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Answer #1

Option b is correct option because Moral Hazard cannot be minimised by allowing company to borrow from other investors.
Moral hazard   means risk for one  party or loss for only one party even though there has been an exchange by two parties. It occurs due to asymmetric information which means a party has more information about particular transaction than the other party. Ex A company get loans by manipulating its balance sheet and other financial statements and hence transferring all risks to banks.
All other options allow bank to gather more information about the company

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