1. The concepts of adverse selection and moral hazard explain the origin of many credit risk management principles involving loan activities, including screening and monitoring, development of long-term customer relationships, loan commitments, collateral, compensating balances, and credit rationing.

2. With the increased volatility of interest rates that occurred in recent years, financial institutions became more concerned about their exposure to interest-rate risk. Income gap and duration gap analyses tell a financial institution if it has fewer rate-sensitive assets than liabilities (in which case a rise in interest rates will reduce income and a fall in interest rates will raise it) or more rate-sensitive assets than liabilities (in which case a rise in interest rates will raise income and a fall in interest rates will reduce it). Financial institutions can manage interest-rate risk by modifying their balance sheets and by making use of new financial instruments.

1. The concepts of adverse seloction and moral hazard explan the crign of many crodit risk maragement principlos involing loan activities, including screering and gap and duration gap analyses tell a finarcial institution it in has fewor rete-seneitive assots than liabilities fin which case a rise in interest ratos wit reduce income and a fali in interest rates wal raise if or more rate-sensitive assets than liablities (in which case a rise in interest rates will raise income and a fall in interest rates will recuce ib. Financial inttutions can manege intervat-rate nisk by modifying their balance sheets and by making use of new financial inatruments