A bank allows us to diversify risk because it has a:
A) big pool of borrowers and savers, so the risk of repayment is spread among many.
B) small amount of borrowers, but many savers, so it can combine savings to make larger loans.
C) small amount of borrowers and savers, so it can connect the optimal saver to the best-matched borrower.
D) big pool of borrowers, but not many savers, so it can choose the riskiest person to borrow from.

Question

Quizplus · Accepted Answer

A bank's big pool of borrowers and savers allows it to diversify risk because the risk of repayment is spread among many people. If one borrower cannot repay their loan, the bank's overall risk is not significantly affected because it has many other borrowers who are still able to repay their loans. Similarly, if one saver decides to withdraw their funds, the bank still has many other savers whose deposits it can use to make loans. Additionally, by pooling funds from many savers, the bank can make larger loans to a smaller number of borrowers, further diversifying its risk.

A Bank Allows Us to Diversify Risk Because It Has