Question

Question 2: Bank AAA has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities, $20 million of rate- sensitive liabilities, 5 million of demand deposit, 10 million of securities, and 0.6 million of reserves. Assume that the required reserve is 10%. a. Reflect the above information in a T account. How much is the Net worth? b. Calculate the required reserve and the excess reserve if any, c. Conduct income gap analysis for the bank, and show what will happen to bank income if interest rates rise by 5%? d. What would happen if the interest rates fall by 5%? e. What actions should the bank manager take if interest rates are expected to fall?

Answer 1

1. T account format

Assets (mn) Liabilities (mn)

---------------------------

15 | 25

30 | 20

05 |

10 |

0.6 |

____________

60.6 $ 45 $

Net Worth = 60.6 - 45 = 15.6 mn $

2. 10% OF 0.6 = 60,000 $ = Required Reserve

Excess Reserve = 600,000 - 60,000 = 540,000 $

3. If interest rate rise by 5% from 10%, New Required Reserve @ 15% = 90,000 $

4. If interest rate fall by 5% from 10%, New Required Reserve @ 5% = 30,000 $

5. If there is a fall in the interest rate, the borrowing of money from the banks will increase.