File Home Insert Design Layout References Mailings Review View FIR Final - Word Tell me what you want to do... (50 pts) 1. As an intern with the Bank of Detroit, Michigan you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus, your bank needs to acquire money market funds in the Eurodollar or Federal Funds markets at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess funds in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Using the Economics of Banking Handouts for this class. Part 1 of this problem, already worked for you, shows that, using Demand/Supply functions to formulate this bank's pro-forma Balance Sheet, that this bank cannot operate as an Asset Management Bank. As an Asset Management Bank, you find that the demand for loans is greater than the supply of fund just from deposits and capital. Part 2 of this problem, since you find that your bank is a liability management bank and must acquire money market deposits, show what the pro-forma balance sheet and income statements will look like, assuming that rates, you determine are constant for all of 2022. Part 1, Assuming an Asset Management Bank Demand function for agriculture loans (LA) IA 13.00% -.0005LA TR = rL = 13 LA -.0005 L dTR A - = 13.00.001Z = 3.00 dLA LA=$10,000 TA= _8.0%_ Demand for function for consumer loans (Lc) Ic 9.00% .0002Lc TR=rL=9.00LC-.0002 dTRc dLc = 9.00-.0004L = 3.00 Lc=$15,000_rc= _6.00%_ Page 1 of 10 2035 words L Share + + 100% FIR Final - Word Mailings Review View Tell me what you want to do... Using the economics of banking theory covered in class, we show how the pro-forma balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where, at the margin, you assume that you would invest excess funds in US Treasury Bills at a return of 3 percent. You will show that you have a problem that demand for assets (Loans) are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) January 1, 2022 Assuming an Asset Management Bank File Home Insert Design Layout References Page 2 of 10 2035 words L U.S. Treasury Securities $0 Demand Deposits $8,000.00 Agriculture Loans $10.000.00 Time Deposits $10,000.00 Consumer Loans $15,000.00 Capital 2,000.00 Total Assets $25,000.00 Total Liab & NW $20,000.00 Therefore, since Total Assets are greater than Total Liabilities plus Capital, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement, assuming that you will acquire money market funds that have a cost/return of 3.15%. Part 2, Assuming a Liability Management Bank Demand function for agriculture loans (LA) IA 13.00% .0005LA TR = rL = 13 LA-.0005 L dTR dLA LA=$ = 13.00-.001Z = 3.15% ra= % Share + + 100% File Home Insert Design Layout References Mailings Review View FIR Final - Word Tell me what you want to do... Demand for function for consumer loans (Lc) rc 9.00% .0002Lc TR=rL=9.00LC-.0002 dTRc dLc Lc=$ -= 9.00.0004L = 3.15% rc= % Supply function for demand deposits (DD) -4.00% + .0004375DD 2 TCD=rD=-4.00D+.0004375D ID dTCD dLD DD= $ =4.00+.000875DD = 3.15% Supply function for time deposits (DT) IT 0.00+.00015DT ID= 2 TC=rD =0.00D +.00015D dTCT dLT DT=$ = 0.00+.0003D = 3.15% % % IT= Page 3 of 10 2035 words L Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) January 1, 2021 Assuming an Liability Management Bank U.S. Treasury Securities $0 Agriculture Loans $ Demand Deposits $ Time Deposits $ EuroDollars $ Share + + 100%