A bank can decrease the degree of moral hazard if it a. Monitors the borrowers behaviors b. Placing covenants on the loan c. Both of the above d. None of the above

C. Both of the above

The correct answer is letter "C": Both of the above.

Explanation:

In banking, moral hazard represents all of those negative behaviors consumers have that could lead to incurring in debt. There are several reasons why borrowers can fall into dent but banks can reduce the losses risk by checking their credit reports to find out if borrowers are incurring much debt they can handle.

Besides, by setting clear loan terms, banks make sure borrowers are subject to penalties in case of not fulfilling their repayment obligations.