1. Discuss the concerns of the bank's manager given the following information regarding each of these five areas of concern (is it a concern or not?) a. Liquidity, b. Compliance, c. Rate-Sensitivity, d. Asset Quality, & e. Capital Adequacy. GIVEN: the reserve requirement is 10% of transaction accounts. Industry averages are 10% for primary liquidity and 15% for secondary liquidity (25% total liquidity). Transaction Accounts and Securities are rate-sensitive, but Loans are not. Risk is perceived to increase beyond acceptable levels if highest quality loans are less than 60% of the Loan Portfolio or money market dependence exceeds 10%, and the capital requirement is 5% on primary capital and 8% inclusive of secondary capital. COMPARE TO ACTUAL POSITION AS INDICATED ON BALANCE SHEET: Liabilities Transaction Accounts MMDA Fed Funds Bought Subordinates Assets Vault Cash Items in Collection Securities Loans AAA rated BBB rated Fixed Assets 10 million 30 million 100 million 600 million 400 million 200 million 10 million 650 million 40 million 10 million 20 million Equity 2. You are concerned about a potential increase in interest rates, which would reduce the demand for your firm's product, significantly negatively impacted sales and profits. The FED is scheduled to meet in one week to assess economic conditions and set monetary policy for the next quarter. Economic growth has been high (GDP at 5% growth for 5 quarters), but inflation has also increased from a level of 3% that had persisted for 6 quarters to 5% in the most recent quarter. The level of unemployment has been at an historic low for two years (8 quarters). With past policy, the FED has been maintaining slow and steady growth in the money supply of about 3%; while keeping the Fed Funds rate targeted in a range of +/- 1% around a mean of 3%. a. Is the FED likely to adjust monetary policy? How? What process/tools will they use if they were to change? b. Recently the FED has allowed the money supply to expand beyond the log-term target range. How does this information affect your expectations concerning the FED's next monetary policy? c. Some have suggested, that if the FED raises just the discount rate, the growth in money supply will slow, changes in Open Market Operations are not needed. Do you agree with this? 30 million d. Comment on the following. Some have noticed that the Fed Funds rate is more volatile when the FED is concerned about inflation, and that the money supply is more volatile when employment is a concem. Do you agree? e. The FED is notified that the Treasury must borrow more than had been expected during the next quarter. What impact would this information have on your answer

1. Discuss the concerns of the bank's manager given the following information regarding each of these five areas of concern (ts it a concern of neth a. Liquidity, b. Compliance, c. Rate-Sensitivity, d. Asset Quality, \& e Copal Adequacy. GIVEN: the reserve requirement is 10% of transaction accounts. Industry avenges are 10% for primary liquidity and 15% for secondary liquidity (25\%6 total liquifity) Transaction Accounts and Securities are rate-sensitive, but Loans are not R. perceived to incrense beyond acceptable levels if highest quality loans are less than 60% of the Laan Portfolio or money market dependence exceeds 10%, and the capital requirement is 5% on primary capital and 8% inclusive of secondary capital. COMPARE TO ACTUAL POSTION ASINDICATE ON BALANCE SHEET: 2. You are concemed about a potential increase in interest rates, which would reduce the demand for your firm's product, significantly negatrvely impacted sales and profits. The RED is scheduict to meet in one weet to astess economic conditions and set monetary policy for the next quarter. Economic prowth has been hirh (GDP at 5% growth for 5 quarters), but inflation has also increaved from a level of 3% that had persisted for 6 quarters to 5% in the most recent quarter. The level of unemploymeat has been at an histonc low for two years (8 quarters). With past poticy., the FHD has been maintaining stow and steady growth in the money supply of about 3%, while keeping the Fed Funds rate targeted in a range of +11% a cound a mean of 3% 2. Is the FED likely to adjust monetary policy? How? What processtools wall they use if they were to change? b. Recertly the FED has allowed the money mpply to expand beyoud the log term target nange. How does this information affect your expectatices concerning the FED's next monetary policy? money supply will slow, changes in Open Market Operations are not needed Do you agree with this? d. Comment on the following Some have noticed that the Fed Funds rate as more volatile when the FED is coecemed about inflation; and that the moesy stepply is c. The FED is notified that the Treanury murt borrow moec than bat been expected during the next quarter. What inpact would this information have cen your