(40 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus your bank needs to acquire money market funds in the Eurodollar market at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess fund in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Use the Economics of Banking Handout for this class. The first part of this problem, using the Demand/supply functions, proves that your bank is a liability management bank. Demand function for agriculture loans (LA) rA = 13.00% - .0005LA LA=$10,000_rA= _8.0%__ Demand for function for consumer loans (LC) rC = 9.00% - .0002LC LC=$15,000_rC= _6.00%_ Supply function for demand deposits (DD) rD = -4.00% + .0004375DD DD= $8,000 rD= -0.50% Supply function for time deposits (DT) rT = 0.00 + .00015DT DT= $10,000 rT= 1.50% Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Asset Management Bank U.S. Treasury Securities $0 Demand Deposits $8,000.00_ Agriculture Loans $10.000.00 Time Deposits $10,000.00_ Consumer Loans $15,000.00 Capital 2,000.00 Total Assets $25,000.00 Total Liab & NW $20,000.00_ Therefore, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement. Demand function for agriculture loans (LA) rA = 13.00% - .0005LA LA=$________ rA= ________% Demand for function for consumer loans (LC) rC = 9.00% - .0002LC LC=$________ rC= _________% Supply function for demand deposits (DD) rD = -4.00% + .0004375DD DD= $_________ rD= ________% Supply function for time deposits (DT) rT = 0.00 + .00015DT DT= $_________ rT= ________% Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Liability Management Bank U.S. Treasury Securities $_______ Demand Deposits $_________ Agriculture Loans $__________ Time Deposits $_________ EuroDollars $__________ Consumer Loans $________ Capital 2,000.00 Total Assets $________ Total Liab & NW $__________ Bank of Milan, Tennessee Income Statement (pro forma) October 1, 2019 September 30, 2020 Assume all rates and balances remain constant for the next year (2020 Fiscal Year) Revenues Interest on Treasury Securities _ $_____________________________ Interest on Agriculture Loans __ $_____________________________ Interest on Consumer Loans _ $_____________________________ Total Interest Revenue ___$_____________________________ Interest Expense Interest on Demand Deposits ___$________________________________ Inte

rest on Time Deposits __ ___$________________________________ Interest on EuroDollars $________________________________ Total Interest Expense ____$________________________________ Net Interest Revenue ______$_________________________________