Editing Adverse selection (section)

===Banking===
When banks and borrowers come together to determine the personal loans, mortgages or business loans, adverse selection is deeply rooted in the discussions.<ref name=Marquez2002>{{cite journal |last1=Marquez |first1=Robert |title=Competition, Adverse Selection, and Information Dispersion in the Banking Industry |journal=The Review of Financial Studies |date=2002 |volume=15 |issue=3 |pages=901–926 |doi=10.1093/rfs/15.3.901 |jstor=2696725}}</ref>

For example, when a new customer approaches a bank seeking a [[personal loan]], they will always know their spending, saving and potential income better than the bank would. This creates adverse selection as the customer possess information about their life which is unknown to the bank, and they can take an economic advantage due to this information.<ref>{{cite journal |last1=Dong |first1=Baomin |last2=Guo |first2=Guixia |title=The relationship banking paradox: No pain no gain versus raison d'être |journal=Economic Modelling |date=2011 |volume=28 |issue=5 |page=2263 |doi=10.1016/j.econmod.2011.06.009}}</ref>

Similarly, when a business requests a loan from a bank, this also creates adverse selection. The business possesses information about market trends, insider business knowledge, and other future happenings relevant to the business that a bank would not know when lending money to a company. 

A further case where adverse selection is relevant is when banks trade loans. This process creates adverse selection, as when a bank transfers a loan to a new bank, they are unaware of how risky the borrower is and the other associated risks that go along with banks lending their money.<ref>{{cite journal |last1=Chari |first1=V. V. |last2=Shourideh |first2=Ali |last3=Zetlin-Jones |first3=Ariel |title=Reputation and Persistence of Adverse Selection in Secondary Loan Markets |journal=American Economic Review |date=1 December 2014 |volume=104 |issue=12 |pages=4027–4070 |id={{ProQuest|1629675912}} |doi=10.1257/aer.104.12.4027 |url=http://www.aeaweb.org/aer/app/10412/20110580_app.pdf }}</ref>

To counteract the effects of adverse selection, banks have moved towards building stronger relationships with their customers, to assist in further understanding some of the hidden information the consumers have when they are borrowing from banks. Furthermore, banks can adjust interest rates to help alleviate some of they unknown risks involved. Banks have also implemented heavier screening on loan applicants so that they are receiving the full picture when they lend their money to borrowers. They are investing significant amounts of resources to gather enough information on borrowers to help estimate the possibility of the loan being repaid by the borrower. Additionally, banks have implemented limits on lending for some borrowers to lower the risk of customers defaulting on their loan.<ref name=Marquez2002/>

Banks have been trying to implement as many safeguards as possible on the borrowing process to try to limit the effects of adverse selection on their business.