1 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. Please determine 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 institution’s 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?
2 Problem 3 I. Consider the balance sheets of Bank A and Bank B. If reserve requirements were 10% of transaction 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 you think 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…