Final answer:
The principle of borrowing involves protection for both the lender and the borrower, with obligations for the borrower to return the item in good condition or rectify any issues. Similarly, banks require income verification, credit checks, cosigners, or collateral before granting loans to mitigate the risks associated with imperfect information about the borrower's intention and ability to repay.
Step-by-step explanation:
When a person borrows a tool from a neighbor and is expected to point out any defects in the tool before taking it, this arrangement provides several forms of protection and obligation. For one, there is protection for the lender, as the borrower is required to either repair or replace the tool if it is returned with a defect. There's also an implied protection for the borrower in being able to inspect the tool before borrowing, ensuring they understand the condition of what they're borrowing and can avoid disputes later on.
In the context of the financial capital market, similar principles apply. Before a bank makes a loan, it undertakes a series of actions to mitigate its risks, which can be likened to the borrower inspecting the tool. The bank requires a potential borrower to provide proof of income, conducts a credit check to assess past borrowing behavior, may require a cosigner as additional assurance, or ask for collateral against the loan. These measures ensure that the bank has some security or recourse should the borrower fail to repay the loan.