econ homework

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Economics

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5.0

Full Credit

Homework is complete and without error or with one or two minor mistakes.

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3.0

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Total 5.0

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ECN 135 Winter 2019 Instructor: Derek Stimel Homework #2 Due Friday Feb. 15 by 5 PM in Canvas Assignment must be uploaded to Canvas as a pdf file or MS Word. It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.) Also, scan must be a single file (no multiple documents or files). 1) For each of the following, state whether it is True or False. No need to provide an explanation. a) b) US businesses rely more on bank loans than Canadian businesses In aggregate, businesses in the four industrialized countries we examined rely more on indirect than direct finance. US businesses rely more on nonbank loans than bank loans as a source of funds. In aggregate, businesses in the four industrialized countries we examined rely more on bank loans than any other category of financing. US businesses rely more on the stock market than the bond market as a source of funds. c) d) e) 2) For each of the following transactions, explain which categories on a bank’s balance sheet would instantly change and how they would change (i.e. up/down, etc.) a) b) c) d) e) A bank customer withdraws $50 from their checking account. The Federal Reserve conducts a $100 open market purchase of short-term securities with a bank. A bank decides to retain $80 of profit it just earned rather than paying it out to shareholders. The Federal Reserve lends $20 to a bank. A bank customer deposits $10 into a certificate of deposit at a bank. The following table provides balance sheet information for a bank. You will use this information for Question 3) and 4). Oddly Even Bank Category Bank Capital Checkable Deposits Long-term CDs Long-term Loans Long-term Securities Money Market Deposit Accounts Reserves Saving Deposits Short-term Loans Short-term Securities Variable Rate CDs Variable Rate Loans Page 1 of 2 $ Value $3 $15 $33 $19 $7 $23 $3 $17 $31 $21 $9 $19 Duration --0.1 3.3 11.0 13.0 0.3 0.0 0.7 1.3 0.5 0.9 7.0 3) a) b) c) d) e) 4) a) b) c) d) e) 5) a) c) d) Using the information provided, construct a balance sheet for Oddly Even Bank. That is, properly list the assets, liabilities, and bank capital of Oddly Even Bank in a T-Account format. What is the reserve ratio for Oddly Even Bank? If the reserve requirement is 25%, does this bank satisfy that requirement? Briefly explain Based on your answer to b) suppose this bank decided to buy or sell short-term securities to match the 25% requirement? Briefly explain how much short-term securities they would need to buy or sell to do that. Using the original balance sheet information, if the reserve requirement was 25% and this bank decided to meet that requirement by increasing their saving deposits (i.e. they conduct a marketing campaign to get more people to sign up and deposit into saving accounts), how much saving deposit inflow do they need? Show a calculation. Using the original balance sheet information, if the reserve requirement was 5%, how much deposit outflow from checking accounts could this bank sustain and still comply with that regulation? Show a calculation. Suppose interest rates in the economy fall from 5% to 3%, what will happen to Oddly Even Bank’s profit? Show a calculation. Calculate the average duration of assets and liabilities for Oddly Even Bank. Suppose interest rates fall in the economy from 5% to 3%, what will happen to Oddly Even Bank’s capital relative to assets? Show a calculation. Using the original balance sheet information, what is the leverage ratio for Oddly Even Bank? Briefly explain whether they comply with regulations for the leverage ratio or not. Using the original balance sheet information, if Oddly Even Bank had an ROA of 1%, what is the banks’s ROE? For each statement, state whether you believe the statement is true or false. Provide a brief explanation of your reasoning. Depositors face an adverse selection problem when choosing where to bank. The principal-agent problem means shareholders face an adverse selection problem in the stock market Financial Services Modernization Act allowed a bank to sell insurance if it wanted to do so. 6) For each of the following you only need to provide a one or two-word response (choose one of the underlined phrases for each statement). a) Because certificates of deposit are less liquid than checking deposits, certificates of deposit are paid more or less interest? b) Higher bank capital decreases the likelihood of bankruptcy and higher bank capital increases or decreases the return on equity for a given return on assets? c) When financial system regulators conduct an examination of bank operations, this is an example of microprudential or macroprudential regulation? d) When we talk about a bank needing to improve its liquidity management, we usually mean the bank the needs to focus on its excess or required reserves level? Page 2 of 2
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Explanation & Answer

Attached.

Running head: BANKING

1

Banking
Student’s name
Institution

BANKING

2

Banking and Economy
1) True or false answers no need for explanation
a) True
b) True
c) False
d) True
e) False
2) Changes on bank’s balance sheet as result of
a) When a bank customer withdraws $50 in his checking account that will reflect an
increase in liability side of the bank’s balance sheet.
b) Bank asset will increase when a federal reserve conducts a $100 open market sale
for short term securities. Thus, increase asset in side of assets bank’s balance
sheet.
c) $80 will be reduced from the liability side of the bank’s balance sheet, if the bank
decides to retain $80 it has just earned rather than paying it out to shareholders.
d) $20 will be reduced from the asset side of the bank’s balance sheet.
e) $10 will be added up in liability side of the bank’s balance sheet.
3) Oddly Even Bank Information
a) Balance Sheet

BANKING

3

Balance Sheet Oddly Even Bank
Liabilities
Amount Asset...


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