Chapter 24 study guide

Chapter 24 study guide - Chapter 24- Risk MGMT in Financial...

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Chapter 24- Risk MGMT in Financial Institutions Managing credit risk o Making loans is a major part of financial institutions business To earn high profits loans need to be successful (paid in full) o Adverse selection and moral hazard are guidelines used in selection Adverse selection- select people with the most sound projects Moral hazard- borrowers may have incentives to take more risk once they have the loan making the loan riskier o **lenders have less information about the investment than borrowers do Screening and monitoring o Screening- must screen out bad proposals Effective screening and information collection limit risk Credit scores gauge a person ability to pay back a loan o Specializing in lending Many companies loan predominately to local firms and specific industries. This is bad because theres a lack of diversity but the institution becomes experts in these areas of specialty o Monitoring- after the loan borrowers are more likely to engage in risky
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This note was uploaded on 02/21/2011 for the course FIN 3403 taught by Professor Duong during the Spring '08 term at The University of Oklahoma.

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Chapter 24 study guide - Chapter 24- Risk MGMT in Financial...

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