Map of Theyern

Map of Theyern on Part of this default risk is related to asymmetric information because the borrowers typically have superior information regarding their project and their own abilities than the bank. In the presence of asymmetric information the bank will only have imperfect ways of distinguishing between the good and the bad projects (borrowers). Asymmetric information leads to two separate problems, adverse selection and MORAL HAZARD. Adverse selection, in the case of a loan contract, suggests that a higher interest rate would only attract riskier investment projects (with possibly higher expected returns). This increases the bank’s loan portfolio because as the interest rate rises, low risk-low return borrowers will be discouraged, potentially leaving those borrowers finance 295 with no intentions to pay their loans back. Thus, adverse selection refers to the situation in which a bank’s own actions increase the default risk it faces before the transaction occurs. Moral hazard, in the context of a bank loan, corresponds to riskier behavior by the borrower after the bank extends a loan. Map of Theyern 2016.

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Map of Theyern

Map of Theyern

Map of Theyern

Map of Theyern Holiday Map Q.

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