A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be reduced,will require borrowers to
A)place a bank officer on their board of directors.
B)place a corporate officer on the bank's board of directors.
C)keep compensating balances in a checking account at the bank.
D)purchase the bank's CDs.

Question

Quizplus · Accepted Answer

Requiring borrowers to keep compensating balances in a checking account at the bank would provide the bank with regular access to information on the borrower's payment practices, making monitoring easier and reducing the likelihood of moral hazard. Placing a bank officer on the borrower's board of directors or requiring the purchase of the bank's CDs would not necessarily provide the bank with the necessary information to monitor payment practices. Placing a corporate officer on the bank's board of directors would not be relevant to the bank's monitoring of payment practices.

A Bank That Wants to Monitor the Check Payment Practices