M & B 4th Edition by Dean Croushore

Exercise 8

Bankers have numerous methods for reducing their risk, such as requiring collateral for loans and imposing covenants. Yet, when recessions occur, banks usually suffer losses on loans that are not repaid. Explain how competition between banks might prevent them from protecting themselves completely against risk. Do you think that it would be a good idea for the government to regulate banks and keep them from competing very vigorously so that they would take less risk?