Final answer:
A high rate of bad debts in an industry can indicate liquidity issues and the potential for significant financial setbacks if the default rate is higher than expected. This situation can also lead to asset-liability mismatches at banks which are exacerbated by financial market changes such as rising interest rates, affecting overall profitability.
Step-by-step explanation:
The industry that has a high rate of bad debts could be indicative of liquidity issues within those businesses. For the Manilow Corporation, operating in an industry with a high rate of bad debts means that there could be a higher risk of cash flow problems as they might not collect all the revenue from sales made on credit. A well-run bank anticipates that some borrowers will default, but an industry-wide high rate of defaults can lead to greater defaults than expected, causing serious financial setbacks for businesses, including potential negative net worth.
Additionally, high levels of defaults can lead to issues with the asset-liability time mismatch. This occurs when bank customers can withdraw their deposits in the short term, while loans given out by the bank are repaid over a longer period. A surge in defaults can cause significant problems, particularly if it coincides with other financial market issues like rising interest rates, which further impact a bank's profitability.