Final answer:
Diversification of loans can help banks protect against high loan default rates and asset-liability time mismatches.
Step-by-step explanation:
One strategy for banks to protect themselves against an unexpectedly high rate of loan defaults and the risk of an asset-liability time mismatch is diversification of loans. By lending to a variety of customers, including both consumers and firms in different industries and geographic areas, banks can reduce their exposure to risk. Diversification helps to balance out categories of borrowers with a high default rate by other borrowers with a low default rate. However, it's important to note that diversification may not be effective during a widespread recession that affects many industries and geographic areas.