Final answer:
To mitigate the risk of high loan defaults and asset-liability mismatches, banks diversify their loans across different customers and sectors. This strategy balances out defaults from various borrowers and helps maintain a positive net worth. Other risk management strategies include FDIC insurance against bank failure.
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 primarily through the strategy of diversification of their loan portfolios. By extending loans across a wide range of customers, including various industries and geographic regions, banks can reduce the impact of defaults from any single sector. While loan diversification helps mitigate risks associated with specific market downturns, it's less effective during widespread recessions that affect multiple sectors simultaneously. Additionally, banks employ other risk management strategies such as purchasing insurance through the Federal Deposit Insurance Corporation (FDIC) to protect against bank failures.