Final answer:
When a primary credit bank has excess credit exposure, it may reduce risk by selling some loans in the secondary market or by increasing reserves. Diversification of the loan portfolio and supervision by banking authorities are also key methods for managing risk and ensuring financial stability.
Step-by-step explanation:
If an organization's primary credit bank or lead institution finds itself with excess credit exposure to the organization, it will usually take measures to reduce this risk. Banks employ several strategies to safeguard their financial health and manage credit risks. One common step is the diversification of the loan portfolio to spread risk. However, when exposure is still deemed to be excessive, the bank may choose to sell off some of the loans in the secondary market. This allows the bank to reduce its risk exposure directly and increase liquidity, often choosing to reallocate the capital to more secure assets, like government bonds or reserves.
Another approach the bank might take is to increase reserves, which provides a buffer against potential loan defaults. Additionally, if bank supervision detects that a bank is overexposed or engaged in risky lending practices, it may require the bank to adjust its lending activities. In severe cases, banks with poor financial health due to high-risk exposure could be forced to merge with or be acquired by a more financially stable bank.