MoneyandBanking

FINA3313-Money and BankingStudent NameInstituteDate1. Rank the following bank assets from most to least liquid: a. Commercial loans 3 b. Securities 2c. Reserves 1d. Physical capital 42. 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?Assets                                                                 Liabilities Required Reserves $ 5 million                                Checkable Deposits $ 92 million Excess Reserves $191 million                                  Bank Capital $ 155 million Loans $51 million3. The bank you own has the following balance sheet:                  Assets                                           Liabilities                  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.