Determine the amount of rate-sensitive assets if rate sensitive liabilities are $467 million.

Problem #1

 

You are the manager of Yihan Bank, and you worry because the income gap currently equals         – $35 million and interest rates are expected to increase by 1.5%.

 

1. a) Determine the amount of rate-sensitive assets if rate sensitive liabilities are $467 million.
2. b) Calculate the change in bank income ($ amount) if interest rates do increase by 1.5%.

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem #2

 

Compute the minimum average duration of assets a bank needs if it wants to tolerate a duration gap not lower than – 1.5 years, assuming the average duration of liabilities is 3.3 years, assets are currently valued at $300 million and liabilities are $280 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem #3

 

1. Sledja Bank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $50 million in commercial loan. If required reserves are 8%, what does the bank balance sheets look like? Ignore any loan loss reserves.
2. Sledja Bank decides to invest $45 million in 30-day T-bills. What does the balance sheet look like?
3. After a week, deposits fall by $6 million. What does the balance sheet look like? Are there any problems?
4. Propose one solution to solve the problem identified in question c. What does the balance sheet look like after you implement your solution?

 

To get full credit, you must DRAW THE BALANCE SHEET AND FILL IN THE ASSETS AND LIABILITIES ITEMS REPORTED IN THE QUESTION

 

 

 

 

 

 

 

 

 

Problem #4

 

Consider the following balance sheet:

 

 

Examine the liquidity management practices of your bank over the last three years. Assume that the reserve requirement is 8% on all deposits.

 

1. How has the liquidity position (in terms of required and excess reserves) of the bank changed over time? How does the liquidity position of your bank compare to the regional banks in year 3? Explain and show your computations.
2. Would your bank have sufficient reserves if deposits increased 40% in year 3? Explain and show your computations.

 

Calculate the equity multiplier ratio for each year. How does the equity multiplier of your bank compare to the regional banks in year 3? Explain

 

 

 

 

 

 

 

Multiple Choice

 

 

Deposit insurance

1. A) attracts risk-prone entrepreneurs to the banking industry.
2. B) encourages bank managers to take on greater risks than they otherwise would.
3. C) reduces the incentives of depositors to monitor the riskiness of their banks’ asset portfolios.
4. D) does all of the above.
5. E) does only A and B of the above.

 

 

 

One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.

1. A) reduces; moral hazard
2. B) increases; moral hazard
3. C) reduces; adverse selection
4. D) increases; adverse selection

 

 

 

Banks do not want to hold too much capital because

1. A) they do not bear fully the costs of bank failures.
2. B) higher returns on equity are earned when bank capital is smaller, all else equal.
3. C) higher capital levels attract the scrutiny of regulators.
4. D) all of the above.
5. E) only A and B of the above.

 

 

The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.

TRUE or FALSE