A depository institution (DI)

1. A depository institution (DI) has the following balance sheet (all amounts are in millions). It expected a deposit drain of $25 million. AssetsDepositsCash$20Deposits$134Loans100Borrowed funds22Securities45Equity9Total…

1. A depository institution (DI) has the following balance sheet (all
amounts are in millions). It expected a deposit drain of $25 million.

AssetsDepositsCash$20Deposits$134Loans100Borrowed funds22Securities45Equity9Total assets165Total liabilities and equity165

Show the DI’s balance sheet if it uses purchased liquidity to offset the expected drain.Show the DI’s balance sheet if it uses stored liquidity to offset the expected drain.

2. A DI has assets of $25 million consisting of:

Cash – $3 million, and

Loans – $22 million.

Its liabilities are:

Core deposits – $15 million,

CDs – $6 million,

repurchase agreements – $1 million,and

subordinated debt – $1 million.

It has equity of $2 million.

Increases in interest rates are expected to cause a net drain of $4 million in core deposits over the next year.

a. On average, deposits cost 4% and the average yield on loans is 7%.
The DI decides to reduce its loan portfolio to offset the expected
decline in deposits. What will be the effect on net interest income and
the size of the DI after the implementation of this strategy?

b. If the interest cost of issuing new short term debt (CD’s or
repurchase agreements) is expected to be 5.5%, what would be the effect
on net interest income and size of the DI if the expected deposit drain
is offset by an increase in these interest bearing liabilities?

3. A financial institution has the following assets (market values):

$120 million in cash reserves,

$120 million in Treasury bills and notes,

$200 million in mortgage loans,

$40 million in corporate bonds, and

$150 million in commercial loans.

If assets are liquidated on short notice, the institution expects to receive

99% of the fair market value of the treasury debt,

90% of the fair market value of the mortgages,

95% of the fair market value of the bonds, and

$75% of the fair market value of the commercial loans.

What is the financial institution’s liquidity index?

4. A bank has $5 million in cash and cash equivalents, $15 million in loans, and $8 million in core deposits.

a. What is the bank’s financing gap?

b. What is the bank’s financing requirement?

5. A bank’s daily withdrawals and deposit over the last 12 months is indicated in the file “deposit data”.

a. What net deposit drain has a probability of 1%?

b. What net deposit drain has a probability of 2.5%?

c. What is probability of a one-day net deposit drain in excess of $25.000?
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