How do commercial banks solve asymmetric information problems? What w

How do commercial banks solve asymmetric information problems?

What will be an ideal response?

ANSWER

By collecting information to reduce the information asymmetry: screening loan applicants and monitoring borrowers once the loan is approved. Loan assets are retained, rather than sold to third parties, so information accumulates over time and, possibly, over several loans to a single borrower. The bank’s “investment” in screening and monitoring allows it to profit from low-risk lending and to provide credit at a lower cost than the borrower can get from a new lender, so the relationship is long-term and mutually beneficial.