The bank, as a financial intermediary, is facing a problem of?Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The bank, as a financial intermediary, is facing a problem of a) liabilities b) adverse selection c) moral hazard d)... | |
I would go for C. The bank will take his house.
None of the above:
1. If the bank keeps the loan, it is safe because home improvement loans are usually backed by the house itself as collateral.
This is NOT a case of moral hazard. It is Scott who is taking the risk and Scott who will lose if he loses the money in Las Vegas.
http://en.wikipedia.org/wiki/Moral_hazar...
Only if Scott could lose the money and have bank, rather than Scott, lose out as a result would it be moral hazard.
2. Often, banks don't hold the loans they make but securitize their loans and sell them.
http://en.wikipedia.org/wiki/Securitizat...
Then if any one ends up losing when/if Scott defaults, it won't be the bank.
This is why so many banks and mortgage companies were willing to give mortgages to people who were clearly going to default.
http://en.wikipedia.org/wiki/Subprime_le...
https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
