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solution

A bank had the following balance sheet ($mm) in 2020:

Assets:

Business Loans 50 , Government Bonds 20, Cash 6,

Liabilities: Demand Deposits 16 Time Deposits 45 Inter-Bank Borrowing 11 Equity 4

(We’ll ignore physical assets, such as real estate, equipment and furniture; as well as other liabilities, such as notes and bonds it has issued.)

Here are the interest rates for the year: Loans 8%, Bonds 3.5%, Demand deposits 0%, Time deposits 3%, Inter-Bank 4%

I Interest Spread is the average rate earned on interest-bearing assets less the average rate paid on interest-bearing liabilities. Calculate it.

II Net Interest Margin is net interest income (interest received minus interest paid) divided by interest-bearing assets. Calculate it.

III Suppose reserve requirements are 3% for demand deposits and 1% for time deposits. What are the bank’s Required Reserves? How much Excess Reserves does the bank carry?

IV Suppose capital requirements are 8% for loans and 0.5% for government bonds. What is the bank’s Required Capital? Is the bank meeting its capital requirements?

V Assume that $10mm of the bank’s loan portfolio stems from a $12mm credit line to a customer. Drawdowns carry the 8% interest rate, while the unused credit line has a charge of 0.25%.

VI Assume the bank also earned $120,000 by revising various Trust services. It also incurred $1.3mm in operating cost (salaries, rent, etc.). What is the bank’s net profit for the year (ignore taxes) and ROE?

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