Quiz 3 A

Banking
Quiz No 3
Name: Arooj Imran E!
Date: 10 October 2020
Question 1:
New-Bank started its first day of operations with $6million in capital. $100 million in
checkable deposits is received. The bank issues a $25 million commercial loan and another
$25 million in mortgages, with the following terms:
• Mortgages: 100 standard 30-year fixed-rate mortgages with a nominal annual rate of
5.25% each for $250,000
• Commercial loan: 3-year loan, simple interest paid monthly at 0.75% per month
1. If required reserves are 8%, what do the bank balance sheets look like? Ignore any
loan loss reserves.
Assets (million $) Liabilities (million $)

Required Reserves 8 Checkable Deposits 100
Loans 50 Bank Capital 6
Excess Reserves 48
2. New-Bank decides to invest $45 million in 30-day T-bills. The T-bills are currently
trading at $4,986.70 (including commissions) for a $5,000 face value instrument.
How many do they purchase? What does the balance sheet look like?
Required Reserves 8 Checkable Deposits 100
Excess Reserves 3
T Bill 45
The bank can purchase these:
T Bills = 45M/4986.7
T Bills = 9024
The actual cost would be 44999980.8
3. On the third day of operations, deposits fall by $5 million. What does the balance
sheet look like? Are there any problems?
The cash will first leave the excess reserves then the remaining reserves:

Required Reserves 6 Checkable Deposits (100-5)=95
T Bill 45
Required reserves would be 0.08x95M = 7.6M
Question 2:
If the bank is getting short of liquidity what steps should be taken by the bank to restore
liquidity? Explain.
Banks can build their liquidity in various manners:
• Shorten resource developments
• Improve the normal liquidity of benefits

• Lengthen obligation developments
• Issue greater value
• Reduce unexpected responsibilities
• Obtain liquidity insurance
Abbreviate resource developments. This can help in two basic manners. To begin with, if the
development of certain advantages is abbreviated by enough that they develop during the time of
a money crunch, at that point there is an immediate advantage. Second, shorter development
resources for the most part are more fluid.
Improve the normal liquidity of advantages. Resources that will develop past the time skyline of
a genuine or potential money crunch can at present be significant suppliers of liquidity, in the
event that they can be sold in an ideal way without an extreme misfortune. There are numerous
ways that banks can improve resource liquidity. Protections are regularly more fluid than credits
and different resources, albeit some huge advances are currently intended to be moderately
simple to sell on the discount markets, so this involves degree and not an outright proclamation.
Shorter development resources are normally more fluid than longer ones. Protections that are
given in huge volume and by enormous organizations for the most part have more prominent
liquidity, as accomplish more trustworthy protections.
Extend obligation developments. The more drawn out term a risk, the more outlandish that it will
develop while a bank is still in a money crunch.

Issue greater value. Regular stock is generally equal to a bond with an unending development,
with the additional favorable position that no intrigue or comparative intermittent installments
must be made. (Profits are regularly paid distinctly out of benefits and are optional.
Diminish unforeseen duties. Scaling back the volume of credit extensions and other unforeseen
responsibilities to pay out money later on diminishes the expected outpourings, subsequently
improving the equalization of sources and employments of money.
Acquire liquidity assurance. A bank can pay another bank or a safety net provider, or at times a
national bank, to ensure the accessibility of money later on, if necessary. For instance, a bank
could pay for a credit extension from another bank. In certain nations, banks have resources pre-
situated with their national bank that can be utilized as insurance to get money in an emergency.

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Quiz 3 A

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Banking

Name: Arooj Imran E!

Date: 10 October 2020

$25 million in mortgages, with the following terms:

5.25% each for $250,000

loan loss reserves.

Assets (million $) Liabilities (million $)

trading at $4,986.70 (including commissions) for a $5,000 face value instrument.

The bank can purchase these:

The actual cost would be 44999980.8

sheet look like? Are there any problems?

Assets (million $) Liabilities (million $)

Required reserves would be 0.08x95M = 7.6M

Banks can build their liquidity in various manners:

• Shorten resource developments

• Improve the normal liquidity of benefits

• Issue greater value

• Reduce unexpected responsibilities

• Obtain liquidity insurance

resources for the most part are more fluid.

liquidity, as accomplish more trustworthy protections.

develop while a bank is still in a money crunch.

improving the equalization of sources and employments of money.

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