The Effect Of Banks’ Bad-Loan Problems On The Level Of Market Confidence And The Stability Of The Malaysian Financial System.
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October 31, 2016
No of pages / words:
3 / 562
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It occurs when a potential borrower wants to take a loan from a bank. Those who have a bad credit risk will most probably get a loan as they will be actively searching for a loan. However, the bank does not have perfect information. Thus, adverse selection happens as the loan has a high chance of default risk and the bank will suffer from bad loan problems...
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However, moral hazard is an asymmetric inflation problem that happens after a loan is given out, where the borrower might engage in high risk activities and have a high credit default risk. In both cases of adverse selection and moral hazard, bad loan problems will most likely to occur. As the non performing loans ratio increases, banks will give out lesser loans and will lose the market confidence...
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