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Deposits = $375mn. Borrowings from interbank market = $75mn. Reserves = $25mn. Govt. securities = $25mn. Commercial loans = $375mn. Reserve requirement is a minimum 5% of deposits and the minium equity capital requirement is 10% of non-reserve assets. You can have excess reserves and capital.

Do you have adequate reserves and capital? Suppose the interest rate on the govt. securities is 2%, interest that you loan at is 5% and interest rate that you borrow at is 5% and your customer deposits (and deposits at the fed) earn no interest. What is your profit? What is your return on assets (ROA)? What is your return on equity (ROE)? Suppose that one of your borrowers defaults and you have to prepare off $25mn from the value of your loans, what happens to your profits, your profitability and your capital ratio?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M958319

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