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5. You have following information on the Bank of Morrisland: it currently holds a total of $150 million in checking account deposits and a
5. You have following information on the Bank of Morrisland: it currently holds a total of $150 million in checking account deposits and a total of $45 million in reserves. It has borrowed $20 million from the Federal Reserve as discount loans. It has raised another $80 million by borrowing through the REPO funding. The bank currently holds $45 million in treasury securities and $120 million in mortgage backed securities. The bank has made a $15 million loan to consumers and a $25 million loans to corporations. The bank has made another $40 million loan in mortgages. Assume that required reserve ratio is 10%. a. What does the bank balance sheet look like? b. Assume that the bank pays depositors 0.5% in interest. The discount rate is 1% and the REPO rate is 1%. The banks receive 0.25% interest payments on its reserve holding, it receives a 2% and 4% interest income on its treasury and MBS holdings, respectively. The bank charges a 5% interest on consumer and commercial loans and mortgages. For simplicity, assume that bank does not pay any taxes. Calculate the after-tax profit, ROA, EM and ROE for the bank. c. Calculate the risk-weighted assets for the bank. Is it a well-capitalized bank according to the Basel Accord? d. Due to troubles in the housing markets, mortgage-backed securities are considered risky resulting in a rise in MBS rates. This causes the present value of mortgage- backed securities to decline to 80m. As a result, regulators forced the bank to sell these mortgage-backed securities to recognize the fair market value. In the meantime, hearing the news depositors pull out 25 million dollars from the bank. What does bank's balance sheet look like? How do these events affect its capital position? e. Find out how much capital injection is required in this scenario so that bank can reach a 10% capital ratio.
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