MONEY AND BANKING
MONEY AND BANKING
1. Rank the following bank assets from most to least liquid:
a. Commercial loans 3
b. Securities 2
c. Reserves 1
d. Physical capital 4
2. New Bank started its first day of operations with $155 million in capital. A total of $92 million in checkable deposits is received. The bank makes a $28 million commercial loan and lends another $23 million in mortgage loans. If required reserves are 5.4%, what does the bank balance sheet look like?
Required Reserves $ 5 million Checkable Deposits $ 92 million
Excess Reserves $191 million Bank Capital $ 155 million
Loans $51 million
3. The bank you own has the following balance sheet:
Reserves $75 million Deposits $500 million
Loans $525 million Bank capital $100 million
If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions should you take?
In the case above the deposit of $50 million outflow will results in the falling of reserves by $50 million to $25 million. The bank needs to acquire $20 million of reserves since the required reserves are $45 i.e. 0.1% of $450 million of deposits. The reserves can be achieved through calling in issuing off $20 million of loans, borrowing the $20 million on a discount rate or borrowing the same amount from the other banks.
4. Suppose you are the manager of a bank that has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5 percentage points. What actions could you take to reduce the bank’s interest-rate risk?
GAP = RSA – RSL
Hence this will result to = + $5 million. This shows that profits will increase by $500,000 only if the interest rates will rise by 5%. Through this interest income will increase by $1,500,000 and interest expense increases by $1,000,000.
$1,500,000 – $1,000,000 = +$500,000.