Question

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" ...He said the banking system could lose deposits in several ways. 'One channel in recent quarters has been domestic fund managers allocating away from cash and deposits to other asset classes – particularly overseas assets,' Mr Jolly said." Source: Banks face cash squeeze as fund managers, households draw deposits (AFR, 15.07.2018) This quote contains some misleading statements. The following questions will help you to get a deeper understanding. These tasks are also exam relevant. Assets ESF OZ Bank AUD 150m Deposits Liabilities and equity AUD 810m Loans AUD 850m Deposits Fund Manager AUD 100m Household AUD 50m Equity AUD 40m Assets Deposits at OZ Bank Fund Manager AUD 100m Liabilities and equity AUD 100m Equity

Answer 1

A) After fund manager buy AUD 100m Bonds from Mr. Red then Deposit amount of Mr. Red in Bank B will increase by AUD 100m & Deposit of fund manager in OZ bank will nill,

So OZ bank will reduce his liablities from Loans account. After withdrawal of fund manager amount then OZ bank has following balance:

OZ Bank
Assets	Aud	Liabiliites	Aud
ESF	150	Deposits	810
Loans	850	Deposit Fund manager	100
Loans	-100	Withdrawal	-100
		Household	50
		Equity	40
	900		900

So loan will reduced by AUD 100M now Loans will be AUD 750M as compare to Deposit AUD 810M. Ratio of Loans to Deposit is 93%

Balance sheet of Bank B:

Bank B
Assets	Aud	Liabiliites	Aud
ESF	100	Deposits	700
Loans	900	Deposit Mr. Red	100
Loans	100	Recd fund	100
		Equity	200
	1100		1100

Ratio of Loans to Deposit is 143%

Balance Sheet of Fund Manager

Fund Manager
Assets	Aud	Liabiliites	Aud
Deposit @ OZ bank	100	Equity	100
Withdrawal	-100
Bond from Mr red	100
	100		100

After Issuing AUD 50M to buyer of OZ bank, so balance sheet are as follows:

OZ Bank
Assets	Aud	Liabiliites	Aud
ESF	150	Deposits	810
		Deposit Fund manager	100
Loans	850	Withdrawal	-100
Loans	-100	Household	50
LoansBonds	50	Equity	40
		Deposit Bonds	50
	950		950