Question

Question 3 A bank has the following assets and liabilities: Mortgage Loans: $240 million Consumer Loans: $250 million Discount Loans: $25 million Demand Deposits: $400 million NOW Deposits: $100 million Treasuries: $25 million Municipal Bonds: $10 million a) The bank has 10% in required reserves and 8% in excess reserves. Calculate the bank capital and show the balance sheet of the bank. b) Assume that net profits after taxes are $6 million. Calculate ROA, ROE, EM, leverage ratio, and capital adequacy ratio. Is the bank in line with the capital requirements? c) If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, show the new balance sheet of the bank. d) Explain what actions the bank manager can take to fulfill the reserve requirements. Explain the costs involved in each action.

Answer 1

The Capital of the business represented by the value its owner invests in the business. General way of calculating the capital would be deducting liabilities from assets of the business which would the capital i.e. network of the business. The same rule applies to bank as well.

One of the components in the given case needs to be calculated which amount of Reserve. Reserves will be % of total deposits of the bank which are as below (they are also the liability of the bank.

Demand Deposits	400
NOW Deposits	100
Total Deposits	500

Hence reserves will be as below;

Required Reserves (10%)	50
Excess Reserves (8%)	40

Now, let’s see assets of the bank which will be as below;

Required Reserves	50
Excess Reserves	40
Treasuries	25
Mortgage loan	240
Consumer loan	250
Discount loan	25
Municipal bonds	10
Total Assets	640

Now, as discussed in the first para, Bank’s capital = Bank’s assets – Bank’s Liabilities

Bank’s Capital = 640 – 500

                           = 140

So for the given case, bank’s capital would be $ 140 mm.

Let's see how the balance sheet would look for this case after above calculation;

Liabilities		Assets
Capital	140	Reserves
Demand Deposits	400	Required Reserves	50
NOW Deposits	100	Excess Reserves	40
		Treasuries	25
		Mortgage loan	240
		Consumer loan	250
		Discount loan	25
		Municipal bonds	10
	640	Total Assets	640

(All the numbers in the above solutions is in mm)