1. Question (35 points): Subprime mortgage market crisis (maximum 500 words)

Discuss the adverse selection and moral hazard problems using the U.S. subprime mortgage market crisis as an example.

1. Question (35 points): Banking (maximum 500 words)

According to modern banking theory, banking functions can be classified in four main categories:

1. Liquidity and money services

2. Asset transformation

3. Managing risk

4. Processing information and monitoring borrowers.

In your own words, using the material and concepts covered in this class, explain how banks perform each one of these functions. Hint: start by defining each function.