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Title: Monetary Economics
Description: Basic T-accounts, Equity and stock holders and return on equity and assets.
Description: Basic T-accounts, Equity and stock holders and return on equity and assets.
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Monetary Economics - Seminar 2
A bank’s balance sheet shows that total assets equal total liabilities plus equity capital
...
THIS IS A FALSE STATEMENT
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When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms
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When you deposit a $50 bill in the Security Pacific National Bank, it’s assets increase by %50
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If a bank has $200,000 of checkable deposits, a required ratio of 20% and it holds $80,000 in reserves, then
the maximum deposit outflow it can sustain with altering its balance sheet is $50,000
...
' ) '"",""")
• =50,000
+$"
...
1 million
...
+ ) +",""",""")
•
=1
...
+
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal
reductions in deposits and reserves
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Bankers’ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the
Fed and borrowings from other banks to deal with deposit outflows is an example of liquidity
management
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A bank’s commitment to provide a frim with loans up to pre-specified limit at an interest rate that is tied to
a market interest rate is called loan commitment
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Risk that is related to the uncertainty about interest rate movements is called interest rate-risk
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If a bank has more rate-sensitive assets than liabilities, then an increase in interest rates will increase bank
profits
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Banks earn profits from off-balance sheet loan sales by selling existing loans for more than the original loan
amount
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As time deposits are less liquid for the depositor than savings accounts, they earn higher interest rates
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With a 10% reserve requirement ration, a £100 deposit into New Bank means that the maximum amount
New Bank could lend is £90
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If nominal GDP is £10 trillion and velocity is 10, the money supply is £1 trillion
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Cutting the money supply by one-third is predicted by the quantity theory of money to cause a decline in
the price level by one-third
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Your bank has the following balance sheet
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After the deposit outflow, the bank will have a reserve shortfall of £15million
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All of the actions will be costly to the bank
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2
...
A
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Assets
Rate-Sensitive
Fixed-rate
Liabilities
£100m
£100m
Rate-Sensitive
Fixed-rate
£75m
£125m
3
...
What would happen to bank profits if the interest
rates in the economy go down? IS there anything that you could do to keep your bank from being
so vulnerable to interest rate movements?
A
...
In order to reduce interest rate sensitivity, the bank manager could use financial
derivatives such as interest rates, swaps, options or futures
...
Title: Monetary Economics
Description: Basic T-accounts, Equity and stock holders and return on equity and assets.
Description: Basic T-accounts, Equity and stock holders and return on equity and assets.