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1. Explain why the formal credit market fails to meet the financial service needs of the poor.
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- In the credit market model with asymmetric information, determine how a consumer will respond to an increase in the fraction of bad borrowers in the population. And discuss how the credit market model with asymmetric information shows how a financial crisis can reduce consumption.What are the advantages and disadvantages of direct lending for the consumer? What can banks do to limit the disadvantages?Which type of information asymmetry explains why bad credit risks are more likely to seek bank loans? A. Moral hazard B. Adverse selection C. Principal-agent problem
- What concerns are there regarding the Paycheck Protecting Program and the Main Street Lending Program? What are the limitations and likely outcomes?In order to earn money, how do financial institutions do it? What conditions restrict their ability to make a profit?How does a lower credit rating affect borrowers lenders and financial institution? What are the implications of the downgrade on the health of the financial system?
- What are the advantages and disadvantages of direct lending for the bank? How are banks reducing the effect of the disadvantages?What are some different methods that can be used for customer returns/bad debt?Which of the following is a reason that banks may favor fee compensation over balance compensation? Balance compensation is not as visible as fees for budgeting purposes. The strategy involves attracting deposits to fund their loans. Earning credits used to determine the value of collected balances are taxable. Deposit balances increase liabilities on the balance sheet.
- What is adverse selection? Why does it predict that lenders will prefer to arrange loans through a commercial bank rather than deal directly with a borrower?What are some different methods that can be used for customer returns/bad debt? which way do you feel most accurately reflects these balances and why?If a bank's credit ratings decrease, How does this affect borrowers, lenders, and financial institutions? What are the implications of this downgrade to the health of the financial system?