4.Consider the balance sheet for River City Bank below. Use the information in t

Question

4.Consider the balance sheet for River City Bank below. Use the information in the balance sheet to answer the following question. Assume the reserve requirement is 10% on checkable deposits. River City Bank Assets Liabilities Reserves $7,000 Checkable deposits $70,000 Securities $3,000 Non-transactions deposits $140,000 Loans $210,000 Capital $ a. What is the level of the Bank?s capital? b. Jose, a checking account holder, withdraws $5000 from his account. How does this affect the Bank?s assets and liabilities? c. Does the bank face an immediate problem as a result of this transaction? If so, what can the Bank do to overcome this problem? d. Assume that because of a recession there is widespread default. $50,000 of the loans go bad and need to written off. Does the Bank face a problem? What could the Bank have done to avoid this problem? 5.Consider the following capital account of a bank. Assets: 1. Rate sensitive assets $160,000 2. Fixed rate assets $260,000 Liabilities: 1. Rate sensitive liabilities $200,000 2. Fixed rate liabilities $250,000 Suppose that the interest rate falls from 5% to 4.5%. Calculate the increase in the profits for the bank, as a result.

Explanation / Answer

a) . $10,000

b)  Checkable deposits are now $65,000, while reserves drop to $2,000. Bank is short of required reserves.

c)  Yes,The bank is short of required reserves. Banks can borrow in the Federal Funds market or sell off some of its securities. It can also call in some of its loans early or borrow from the FED (discount loans). Each option has its costs. Borrowing from other banks implies interest costs. Selling off assets in secondary market implies possibility of capital losses and brokerage fees

d) The bank can write?off $10,000 of bank capital against the loans, but this still implies that its liabilities exceed its assets by $40,000. The bank is insolvent!
The bank could have maintained (i) a higher level of bank capital (a higher amount could be written off in that case), (ii) required more

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