ECON 3323-002 Money & Banking Chapter 9 homework
Suppose First National Bank holds $100 million in assets with an average duration of 4 years, and it holds $85 million in liabilities with an average duration of 3 years. Further suppose there is a 5-percentage-point increase in interest rates. Calculate the percentage decrease in First National Bank's net worth relative to the total original asset value.
A 5-percentage-point increase in interest rates decreases First National Bank's net worth by 7.25% of the total original asset value.
what is a Gap Analysis
A measurement of the sensitivity of bank profits to changes in interest rates, calculated by subtracting the amount of rate-sensitive liabilities from the amount of rate-sensitive assets.
What is a Duration Analysis
A measurement of the sensitivity of the market value of a bank's assets and liabilities to changes in interest rates.
NewBank started its first day of operations with $121 million in capital. A total of $93 million in checkable deposits is received. The bank makes a $28 million commercial loan and another $24 million in mortgage loans. The required reserve ratio is 8.3%.
Assets are Required reserves $8 million, excess reserves of $154 million, and loans of $52 million. Liabilities are checkable deposits of $93 million and bank capital of $121 million
Suppose that you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates rise by 2 percentage points.
Assets fall in value by $8 billion. Liabilities fall in value by $10.80 billion. Net worth increases by $2.8 billion.
If a bank experiences a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, which balance sheet would the bank rather have initially: Balance Sheet A or Balance Sheet B? Why?
Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.
A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
Compensating balances help establish long-term customer relationships, which make it easier for the bank to collect information about prospective borrowers, thus reducing the adverse selection problem, Compensating balances help the bank monitor the activities of a borrowing firm, which reduces the moral hazard problem, and Compensating balances can act as collateral
"Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans." Is this statement true or false? Explain your answer.
False. A bank may have developed expertise in screening and monitoring a particular type of loan, thus improving its ability to handle problems of adverse selection and moral hazard.
If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
Given the ROA, if bank capital doubles, then ROE will fall by half.
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available for you to provide the funds your customer needs?
No. There are several ways that reserves can be acquired. For example, the bank can borrow at the discount window or in the federal funds market, or it can acquire funds by issuing negotiable CDs.
A bank finds that its ROE is too low because it has too much bank capital. Which of the following will not raise its ROE?
The bank can sell part of its holdings of securities and hold more excess reserves
Suppose that 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.
The change in bank profits is $0.5 million
X-Bank reported an ROE of 16% and an ROA of 1.06%. What is the equity multiplier?
The equity multiplier is 15.09
How well capitalized is this bank
This is a well-capitalized bank because its equity/asset ratio exceeds the minimum required level.
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
You would want to make short-term loans so you can reinvest the funds at higher interest rates after their maturity.
Which of the following may not be used as a backup line of credit?
mortgages
Large-denomination CDs are ________, so that like a bond, they have a ________degree of liquidity and can be sold in secondary markets.
negotiable; greater
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a check for $40 on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank.
T-account for the First National Bank: Assets reflect negative 40 in reserves; liabilities reflect negative 40 in checkable deposits. T-account for the Second National Bank: Assets reflect positive 40 in reserves; liabilities reflect positive 40 in checkable deposits.
