What actions you take to reduce banks interest rate risk

Reference no: EM133734452

Assignment: Banks & Deposit Outflows

I. Why might a bank be willing to borrow funds from other banks at a higher rate than the rate at which it can borrow from the Fed?

II. The bank you own has the following balance sheet:

	Assets		Liabilities
Reserves	$75	Deposits	$500
Loans	$525	Bank capital	$100

If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions should you take?

III. If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available that will enable you to provide the funds your customer needs?

IV. If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

V. If you are a banker and expect interest rates to rise in the future, would you prefer to make short-term loans or long-term loans?

VI. Angus Bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9%, and reserves are currently $27 million. Determine the amount of deposits, the reserve shortage created by a deposit outflow of $5 million, and the cost of the reserve shortage if Angus Bank borrows in the federal funds market (assume the federal funds rate is 0.25%).

VII. Suppose you are the manager of a bank that has $15 million of fixed rate assets, $30 million of rate-sensitive assets, $25 million of fixed rate liabilities, and $20 million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5 percentage points. What actions could you take to reduce the bank's interest rate risk?

Reference no: EM133734452

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