Final answer:
Bank regulators can assure depositors that a bank is not taking on too much risk by requiring the bank to diversify its loan portfolio and to reduce its equity capital. Therefore, the correct answer is (A) diversify its loan portfolio.
Step-by-step explanation:
Bank regulators can assure depositors that a bank is not taking on too much risk by requiring the bank to diversify its loan portfolio and to reduce its equity capital. Diversifying the loan portfolio involves lending to a variety of customers in different industries and geographic areas, which helps to balance out the risk of loan defaults. Reducing equity capital helps to ensure that the bank has enough capital to cover any losses in case of defaults. Therefore, the correct answer is (A) diversify its loan portfolio.
Bank regulators can ensure that banks manage risk effectively by requiring them to diversify their loan portfolios, which balances risk across different sectors and geographic areas.
One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to diversify its loan portfolio. By lending to a variety of customers, banks reduce the risk of a significant number of defaults from any single sector or geographic area. Diversification tends to balance out the losses from one group of borrowers with the successful repayments from others.
This approach tends to help banks maintain a positive net worth and therefore protects the interests of depositors. On the other hand, reducing equity capital or the size of the loan portfolio could be counterproductive as it might weaken the bank's financial stability and lending capacity.