1. Discuss the concerns of the banks manager given the following information regarding each of these five areas of concern (is it a concern or not?)

a. Liquidity, b. Compliance, c. Rate-Sensitivity, d. Asset Quality, & e. Capital Adequacy.

GIVEN: the reserve requirement is 10% of transaction accounts. Industry averages are 10% for primary liquidity and 15% for secondary liquidity (25% total liquidity). Transaction Accounts and Securities are rate-sensitive, but Loans are not. Risk is perceived to increase beyond acceptable levels if highest quality loans are less than 60% of the Loan Portfolio or money market dependence exceeds 10%; and the capital requirement is 5% on primary capital and 8% inclusive of secondary capital.

COMPARE TO ACTUAL POSITION AS INDICATED ON BALANCE SHEET:

Assets Liabilities

Vault Cash 10 million Transaction Accounts 650 million

Items in Collection 30 million MMDA 40 million

Securities 100 million Fed Funds Bought 10 million

Loans 600 million Subordinates 20 million

AAA rated 400 million

BBB rated 200 million

Fixed Assets 10 million Equity 30 million