a. 4. The Bank of Morrisland starts its day of operations with $9 million in capital. A total $125 million in checkable deposits are received. It has borrowed $20 million from the Federal Reserve as discount loans. It has also borrowed another $10 million in the overnights market (federal funds market) from J.P. Morgan Chase. The bank holds $15 million in treasury securities and $15 million in municipal bonds. The bank makes a $15 million loan to consumers and a $25 million loans to corporations. The bank makes an additional $60 million loan in mortgages. Assume that required reserve ratio is 8%. 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 federal funds rate is 0.5%. The banks receive 0.25% interest payments on its reserve holding, it receives a 2% and 3% interest income on its treasury and municipal bond holdings, respectively. The bank charges a 5% interest on consumer and commercial loans and 6% interest on 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. it a well-capitalized bank according to the Basel Accord? d. Suppose later in the day, terrible news hits the market and mortgage rates (interest rates on mortgages) increase which lowers the present value of current mortgage holding to $30million. Bank regulators force the bank to sell its mortgages to recognize the fair market value. 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. a. 4. The Bank of Morrisland starts its day of operations with $9 million in capital. A total $125 million in checkable deposits are received. It has borrowed $20 million from the Federal Reserve as discount loans. It has also borrowed another $10 million in the overnights market (federal funds market) from J.P. Morgan Chase. The bank holds $15 million in treasury securities and $15 million in municipal bonds. The bank makes a $15 million loan to consumers and a $25 million loans to corporations. The bank makes an additional $60 million loan in mortgages. Assume that required reserve ratio is 8%. 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 federal funds rate is 0.5%. The banks receive 0.25% interest payments on its reserve holding, it receives a 2% and 3% interest income on its treasury and municipal bond holdings, respectively. The bank charges a 5% interest on consumer and commercial loans and 6% interest on 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. it a well-capitalized bank according to the Basel Accord? d. Suppose later in the day, terrible news hits the market and mortgage rates (interest rates on mortgages) increase which lowers the present value of current mortgage holding to $30million. Bank regulators force the bank to sell its mortgages to recognize the fair market value. 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
