B has only one loan of $100 million outstanding, which it also expects will be
repaid today. Each loan has a 5% probability in case they default. Explain
the difference between the risk of each bank.
The expected payoffs are the same, but bank A is less risky.
If suppose one loan of each default !!!
Bank TWO will be completely exhausted !!
But bank ONE will still sustain !!
Hence the trade off will be adjusted if even a few loans default for bank ONE but bank TWO will loose its sustainability !!!
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