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Chapter 10: Q.11 (page 283)

How does bank chartering reduce adverse selection problems? Does it always work?

Short Answer

Expert verified

The chartering bank is a bank regulation that reduces the danger of a negative decision by attempting to analyse recommendations for new banks in order to prevent risky business visionaries and hoodlums from controlling them. For risk-taking entrepreneurs, it may not always work. Hooligans also use motivators to hide their true nature and may slip through the cracks in the chartering system.

Step by step solution

01

Concept Introduction

The chartering bank is a bank regulation that reduces the adversarial choice issue by attempting to analyse recommendations for new banks in order to prevent risky business persons and lawbreakers from controlling them.

02

Explanation

Adverse selection happens when there is an absence of symmetric data before an arrangement between a purchaser and a vender. moral danger is the gamble that one party has not gone into the agreement with honest intentions or has given misleading insights concerning its resources, liabilities, or credit limit.

To solve the adverse selection problem in financial markets is to stop asymmetric information by providing the relevant information about borrowers to investors.

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