1. Identify and explain the main information asymmetry problems found in a typical commercial

bank. How can the bank minimize the impacts from these problems. Give examples as

appropriate.

2. A small retail bank (which is also a small part of a financial holding company) is having a bank

run because of a negative rumor on this bank. It needs short-term liquidity to restore its clients'

confidence. The CEO of this bank expects that the run will last two to three days only.

This bank is holding significant amount of U,S. Treasury securities and the bank management is

considering whether they should sell some of these securities, or else seek for help from the

parent company.

On the other hand, a pension fund company has significant cash holdings, ready for any

investment opportunities of any terms.

What are your suggestions to this bank? Other than using the 'internal' resources (Treasury

bills and help from parent company), is/are there any way(s) to make use of the pension fund

company? Show the various risks involved.

3. Suppose used-car buyers cannot distinguish the quality of the car and, on average, people value a good used-car at $150,000 and a lemon' (low-quality car) at $50,000 only. Explain why the

average price of $100,000 for used-cars will not bring used-cars of average quality to the market.