Discuss intuitively how capital can help the bank to resolve adverse selection problems. It would be useful
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Discuss intuitively how capital can help the bank to resolve “adverse selection” problems. It would be useful to start out by explaining first what we mean by “adverse selection,” and why it is a problem for the bank. Can you relate this role of capital in a bank loan contract to a venture capitalist’s insistence on a minimum equity capital input by an entrepreneur seeking venture capital?
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Adverse selection is a condition where a borrower knows more about its credit quality than the bank ...View the full answer
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Related Book For 
Contemporary Financial Intermediation
ISBN: 9780124052086
4th Edition
Authors: Stuart I. Greenbaum, Anjan V. Thakor, Arnoud Boot
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