Explanation:
The relaxation of lending requirements can introduce a hidden systematic risk into credit portfolios. When lending requirements are lowered, such as not thoroughly scrutinizing borrower income, it can lead to a sudden increase in the number of defaults. This is because people without reliable sources of income, and therefore without the means to repay their loans, are able to borrow money. This behavior has the potential to trigger value losses across the market.
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Q.2012 Retail lending entails offering facilities to a large group of borrowers in relatively small amounts, thereby naturally bringing about diversification. However, certain lending behaviors can erode the benefits of diversification and result in market-wide financial turmoils as highlighted by the 2007/2008 financial crisis. Which of the following behaviors is likely to result in less than perfect protection from systemic risks?
A
International lending
B
Relaxation of lending requirements
C
Multi-currency lending
D
Using the property advanced to the borrower as the sole source of collateral
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