Question A1

1. Banks use screening to reduce the adverse selection problem and use monitoring to reduce the moral hazard problem in their loan businesses. However, screening and monitoring would involve costs. Give two examples on how banks could reduce their screening costs, and one example on how they could reduce the monitoring costs.(7 marks)
2. Discuss the role of net worth in helping the banks to reduce the moral hazard problem in their loan businesses. Also discuss the role of collaterals and guarantors in reducing the risk of bank loans.(7 marks)
3. Discuss the role of government regulations on reducing the adverse selection problems and the moral hazard problems in the stock market. Briefly compare the Malaysian government's performance and the Singapore government's performance on these issues.(11 marks) (TOTAL: 25 marks)