Negative selection also known as adverse selection

In the financial market, the fact that – banks can never assess the creditworthiness of borrowers with absolute accuracy, even with a high level of rating performance, – their borrowing rates (interest rates) must therefore be set at an average level, – this means that high-quality borrowers are worse off because they have to pay borrowing costs that are too high in comparison with their creditworthiness, – these high-quality borrowers therefore refrain from making profitable investments, while – low-quality borrowers are encouraged to make less successful or even loss-making investments because their actual creditworthiness is too low: sub-prime] borrowers) are encouraged to make less successful or even loss-making investments, since they have to pay too low borrowing costs relative to their actual creditworthiness, and – this ultimately leads to a misallocation of scarce resources: the money does not go to the “best host” (most favorable allocation of scarce resources). – See adverse selection, funding premium, external, house bank, information, asymmetric, credit absorption, ‘market, perfect, middle market bank, moral hazard, net welfare loss, rating, risk, riskignorance, structural upheaval, subprime crisis, insurance uncertainties, competition.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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