Question

which of the following scenarios would be most likely to cause a small bank to be less willing to loan money to small businesses in a community?

the bank cannot sell the loan to some other bank.
the bank cannot make a profit on the loan.
the customer has too much in savings.
the community cannot grow from the loan.

Explanation:

Analyze the bank's primary incentive

Banks operate as profit-seeking financial institutions. Their primary incentive for lending money to individuals or businesses is to earn a return on that capital, primarily through interest payments that exceed their cost of funds and operational expenses.

Evaluate the impact of each scenario

• The bank cannot sell the loan to some other bank: While loan liquidity is important, banks (especially small community banks) frequently hold loans to maturity on their books. This would not be the most direct or strongest deterrent to lending.
• The bank cannot make a profit on the loan: If a bank cannot generate a profit from a transaction, it has no economic incentive to take on the default risk associated with lending. This directly undermines the core business model of banking.
• The customer has too much in savings: High savings generally indicate lower default risk and stronger financial health, making a bank more willing, not less willing, to lend.
• The community cannot grow from the loan: While community development is a positive externality, a bank's primary lending decision is based on financial viability and profitability rather than community growth metrics.

Determine the most likely cause

The inability to make a profit is the most fundamental barrier to lending, making it the scenario most likely to cause a bank to be unwilling to issue a loan.

Answer:

• (A) The bank cannot sell the loan to some other bank.
• (B) The bank cannot make a profit on the loan. (Correct answer)
• (C) The customer has too much in savings.
• (D) The community cannot grow from the loan.