Indeed, rising adverse selection together with increased precautionary demand for liquidity, nearly led in august 2007 to the euro money market providing a real-life illustration of Akerlof’s “market for lemons” prediction of how information asymmetries in a market with uncertainty about the quality of goods (in this case of credit claims) may lead to a decline in trading and, potentially, to the collapse of the market.
Individual financial institutions should work for a business model that makes the time horizon of maximizing their profits longer. The Bank attaches great importance to the medium- to long-term forecast of profits in its off-site monitoring and on-site examinations, because a competitive environment and the time horizon to maximize financial institutions' profits are closely related.