Suppose that the First National Bank has the following balance sheet position an

Question

Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 20 percent. Assets Reserves S30 million Deposits $120 million Loans $90 million Bank Capital $15 million Securities S15 million 1. If the bank suffers the deposit outflow of S6 million, what will its balance now look like? Show this by filling in the amounts in the following balance sheet: Assets Liabilities Reserves Deposits Loans Bank Capital Securities 2. Suppose now the bank is hit with another $4 million deposit outflow. Whatwl its balance sheet position look like now? Assets Liabilities Reserves Deposits Loans Bank Capital Securities a) Must the bank make an adjustment in its balance sheet? b) Why or why not? 3. After selling off the securities to meet its reserve requirements, what will its balance sheet look like? Assets Liabilities Reserves Deposits Loans Bank Capital Securities 4. If, after selling off securities, the bank is hit by another $10 in withdrawals of deposits and it sells off all its securities to obtain reserves, what will the balance sheet look like? Assets Liabilities Reserves Deposits Loans Bank Capital Securities 5. If the bank is now unable to ca in or sell any of its loans and no one is willing to lend money to this bank, what will happen to the bank and why? 6. Using the beginning balance sheet for First National Bank and assuming that First National bank has a net profit after tax of $1,800,000 a. Calculate First National Bank's Return on Assets (ROA) b. Calculate First National Bank's Equity Multiplier (EM) c. Using the info in a and b, calculate First National Bank's Return on Equity (ROE).

Explanation / Answer

Part -1

Deposit Outflow $6 Million , Balance Steet Value

Part - 2

Anothe $ 4 Million Deposit Outflow , Balance Sheet Value

Part -2.a.

Yes, Bank Must be adusted in the Balance Sheet because 10 millionn Outflow of Deposits and also Reduce the Reseve then only balance sheet shows correct Figure Deposit and Reserve respectively.

Part -3

Selling off securities meet the requirement , Balance Sheet Value

Part - 4

Another 10 Million withdrawal the Deposits ,Balanc Sheet Value

Part - 5

The Balance Sheet Same as Part - 4 above because no transaction occured Loan and Lend Money of the Bank.

Part - 6

A. Return on Assets = Net Income /Total Assets

= 1,800,000/135,000,000

=13.33%

B.Equity Multiplier = Total Assets/Share holder Equity

=135/15

=9

C.Return on Equity = Net Income / Share Holder Equity

=1,800,000/15,000,000

=12%

Assets Amount in Million $ Liabilities Amount in million $ Reserve 24 Deposits 114 Loans 90 Bank Capital 15 Securities 15 Total 129 129

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