A bank had the following balance sheet during 2016. Also shown are the interest rates:

Assets amount ($mm) rate, %

Business Loans 50 6

Corporate Bonds 25 5

Government Bonds 18 2.5

Cash 6

Real assets 2

Liabilities

Demand Deposits 36 0

Time Deposits 45 1.1

Inter-Bank Borrowing 15 1.25

Equity 5

I Assume reserve requirement are 3% for demand deposits, 0% for time deposits. How much excess reserves does the bank have?

II Suppose capital requirements are:

8% for loans

4% for bonds with default risk

4% for inter-bank lending

Does the bank have enough capital?

What if the capital requirement for loans increases to 10%? Which of the following will cure the deficiency entirely, partially or not at all:

The bank issues new shares with a market value of $2mm and uses the funds to make $2mm in new business loans.

The bank issues $1mm in demand deposits and uses the funds to purchase $1mm additional government bonds.

$5mm of the loans default (no capital is required for a defaulted loan that is written off).

III A. Calculate Net Interest Margin for the year.

The bank also received $200,000 in non-interest (fee) income during the year, and paid $1.5mm in labor compensation and other expenses for the year. What was its ROE?

B. The bank is considering issuing enough equity to replace all its time deposits. If nothing else changes, what is the new NIM and the new ROE?