What is the moral hazard problem that commercial banks face? when capital requirements are too high, banks need to reduce their lending. where two parties to a potential transaction have unequal knowledge before the loan is made. borrowers have the option to switch banks if they do not approve of the loan terms or interest rate they will receive. when the borrower knows that someone else will pay for the mistake he makes. This in turn gives him the incentive to act in a riskier way