Assume Magyar Bank has the following balance sheet (in millions):

Assets		Liabilities and equity
Cash	$ 40	Deposits	$94
Loans	80	Borrowed funds	58
Securities	60	Equity	28
Total assets	$180	Total liabilities and equity	$180

Magyar Banks largest customer decides to withdraw its deposit amounted to $9 million.

a) How will the new balance sheet appear if Magyar Bank uses the following liquidity risk strategies: (i) stored liquidity management; (ii) purchased liquidity management? (7 marks)

Assets		(i)	(ii)	Liabilities and equity		(i)	(ii)
Cash				Deposits
Loans				Borrowed funds
Securities				Equity
Total assets				Total liabilities and equity

b) Promstroy Bank has assets of $14 million consisting of $1 million in cash and $13 million in loans. Promstroy Bank has core deposits of $8 million, subordinated debt of $3 million and equity of $3 million. Increases in interest rates are expected to cause a net drain of $3 million in core deposits over the year. The average cost of deposits is 7 per cent and the average yield on loans is 9 per cent. The FI decides to reduce its loan portfolio to offset this expected decline in deposits.

What will be the net effect on net interest income and the size of the bank after the implementation of this strategy? (7 marks)

c) Commerzbank has assets of $15 million consisting of $1 million in cash and $14 million in loans. Commerzbank has core deposits of $8 million, subordinated debt of $4 million and equity of $3 million. Suppose one of the banks business customers decides to exercise its loan commitment by borrowing $2 million at the pre-specified rate of 9 per cent.

If the bank decides to purchase liquidity and the interest cost of issuing new short-term debt is expected to be 8 per cent, what will be the effect on net interest income? What will be the size of the FI after these changes? (6 marks)