Examine an adverse selection problem Wells Fargo is facing, and recommend how it should minimize its negative impact on transactions

Wells Fargo is facing today a complicate situation since it has been accused of carrying out transactions on behalf of their customers without their consent. Basically, the bank opened thousands of banks accounts in the name of its customers without their consent. In court, Wells Fargo was found guilty.

In consequence, the problem of adverse selection for customers was that they were making the decision of operating with Wells Fargo without having full access to the information regarding the operations the bank was carrying out on their behalf.

The only way to reduce this adverse selection problem for Wells Fargo is to operate on a different basis, giving privilege to the development of a relationship with customers based on trust and confidence.

Another adverse selection problem that Wells Fargo faces is the typical problem faced by banks. Indeed, when Wells Fargo gives a loan it is not completely sure about the re-payment capacity of custormers. In consequence, the bank has to spend a lot of money trying to understand the risks profiles of customers in order to charge different interest rates to different risk profiles. This is the best solution indeed.