Final answer:
Banks utilize loan diversification to mitigate risks of high loan defaults and asset-liability mismatches, spreading loans across various sectors and regions to balance potential losses.
Step-by-step explanation:
Banks can protect themselves against an unexpectedly high rate of loan defaults and the risk of an asset-liability time mismatch by employing several risk mitigation strategies. One key strategy is loan diversification, which entails lending to a diverse group of customers across various industries and geographic areas. This approach reduces concentration risk because losses from one segment can potentially be offset by better performance in other segments. However, in the case of a widespread recession that affects multiple sectors, diversification alone may not suffice to protect the bank's net worth.