The principal-agent problem that exists for bank trading activities can be reduced through:

a) Creation of internal controls that combine trading activities with bookkeeping,

b) Creation of internal controls that separate trading activities from bookkeeping,

c) Elimination of regulation of banking,

d) Elimination of internal controls.

The correct answer is b) Creation of internal controls that separate trading activities from bookkeeping.

The principal-agent problem is usually caused by asymmetric information. One of the best ways to minimize the risks associated with the principal-agent problem is separating trading from other bookkeeping activities. This provides clarity between the operations and transactions between the different activities undertook by the principal and the agent. Therefore, any person would have the possibility to check the values recorded corresponding to the trading activities separated from the others. In contrast, the combination of trading actives with bookkeeping reduces the visibility of the records increases risks of misunderstandings. Elimination of regulations and internal control would lead to a decrease in the quality of the information allowing the possibility to encounter the principal-agent problem.