Danube Bank has the following balance sheet with the interest rates in brackets. Answer (i) and (ii)

Increases in interest rates are expected to cause a net drainof $2 million in core deposits over the year.

i.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?

ii.The FI decides to purchase liquidity. The FI can borrow through the over-the-counter market for 7%. What will be the effect on net interest income and the size of the bank after the implementation of this strategy?

iii.What is liquidity risk?Define briefly with an appropriate example.

iv.How is liquidity risk associated with the asset side of the balance sheet?

v.Briefly discuss the risk-return trade-off associated with managing bank liquidity.

vi.List three typical reasons for abnormal deposit drains?