HOMEWORK 4
Please answer all questions. Show your work.
Problem 1
I. The bank you own has the following balance sheet:
Assets
Liabilities
Reserves
$75M
Deposits
$500M
Loans
$525M
Bank Capital
$100M
If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions must you take to keep your bank from failing?
II. If a deposit outflow of $50 million occurs, which balance sheet would a bank rather have initially, the one in in part (a) or the following? Explain why.
Assets
Liabilities
Reserves
$100M
Deposits
$500M
Loans
$500M
Bank Capital
$100M
Problem 2
I. Watson County National Bank presents us with these figures for the year just concluded. Pleasedetermine the net profit margin, equity multiplier, asset utilization ratio, and ROE.
Net income = $25
Total operating revenues = $135
Total assets = $1,700
Total equity capital accounts = $160
II.Bluebird Savings Association has a ratio of equity capital to total assets of 9 percent. In contrast,Cardinal Savings reports an equity-capital-to- asset ratio of 7 percent. What is the value of the equity multiplier for each of these institutions? Suppose that both institutions have an ROA of 0.85 percent.
What must each institutions return on equity capital be? What do your calculations tell you about the benefits of having as little equity capital as regulations or the marketplace will allow?
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Problem 3
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I.Consider the balance sheets of Bank A and Bank B. If reserve requirements were 10% oftransaction deposits and both banks had equal access to the interbank market and funds from the Federal Reserve, which bank do you think faces the greatest liquidity risk? Explain your answer.
II. Looking again at Bank A and Bank B, based on the information available, which bank do youthink is at the greatest risk of insolvency? What other information might you use to assess the risk of insolvency of these banks?
Problem 4
This assignment asks you to work with data available from FDIC website (as discussed in class). You need to analyze some of the major trends in the U.S. banking system over the past few years. Follow these steps and make sure to answer all questions fully.
Instructions:
Download financial data for All Commercial Banks, All Commercial Banks with Assets $500M – $1B, All Commercial Banks with Assets more than $10B, and any other small or large individual bank of your choice for December 2000, December 2007, December 2009, and December 2012.
Arrange your data in a well-formatted table with all account categories properly aligned.
Review the data and write up your analysis answering the following questions:
Briefly comment on top 5 trends in the banking industrys Assets and Liabilities management across years and financial institutions categories selected.
i. Hint: look at data in relative terms (%) vs. absolute $ values
ii. Is there a difference between small / large banks treatment of Assets and
Liabilities?
Relate your analysis to a similar analysis of your chosen bank compared to either
all or relevant group of banks based on the assets size (i.e. either 500M-1B range or over $10B range depending on your choice of an individual bank).
Based on your analysis and knowledge from class discussions, other courses, media, economic history, etc.; can you make any forward looking statements on banks evolution?