Banks attempt to screen out the good credit risks from the bad credit risks to r

Question

Banks attempt to screen out the good credit risks from the bad credit risks to reduce the incidence of loan defaults. To do this, banks do all of the following except:

Banks expend resources to acquire accurate credit histories of their potential loan customers.

Banks specialize in lending to certain industries or regions.

Banks hold excess reserves.

Banks diversify their lending portfolios.

Banks write restrictive covenants into loan contracts.

Banks expend resources to acquire accurate credit histories of their potential loan customers.

Banks specialize in lending to certain industries or regions.

Banks hold excess reserves.

Banks diversify their lending portfolios.

Banks write restrictive covenants into loan contracts.

Explanation / Answer

Correct Answer:

C.

Banks hold excess reserves.

Explanation:

Banks try to lend money to borrowers, rather keeping excess reserve with themselves. This is the basis of their interest earning business. Except option “C”, all other options are the initiatives, taken by the banks to identify borrowers with good credit so that their loans and advances don’t turn bad debt.

C.

Banks hold excess reserves.

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