Financial Institutions Management

E Financial Institutions Management (40 pts) 1. As an intern with the Bank of Milan, Tennessee, 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 market at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess fund in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Use the Economics of Banking Handout for this class. The first part of this problem, using the Demand/supply functions, proves that your bank is a liability management bank. Demand function for agriculture loans (LA) TA = 13.00% - .0005LA TRA = rL =13L, -.00052 dTRA = 13.00-.001L, = 3.00 dLA LA=$10,000 rA= _8.0%_ Demand for function for consumer loans (Lc) rc = 9.00% - .0002Lc TR = rLc =9.00Lc -.0002Lc dTRC = 9.00-.0004Lc =.0300 dLc Lc=$15,000_rc= _6.00%_ Supply function for demand deposits (DD) I'D =-4.00% + .0004375DD TCD = rDD =-4.00D, +.0004375DD dTCD = -4.00+.000875D, = 3.00% dLD DD= $8,000 ID= =0.50% Supply function for time deposits (DT) IT = 0.00 + .00015DT TC = ID =0.00D +.00015D,2 dTCT = 0.00 + .0003D, = 3.00 dLT DT= $10,000 IT= 1.50% Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma)October 1, 2019 Assuming an Asset Management Bank 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 $20,000.00 Therefore, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement. Demand function for agriculture loans (LA) TA = 13.00% - .0005LA TRA = rL =13LA -.000514 dTRA = 13.00-.001LA = dLA % LA=$ TA=_ Demand for function for consumer loans (LC) rc =9.00% - .0002Lc TRe = rLc =9.00Lc -.0002L'c dTRC = 9.00-.0004Lc = o/c dLc Lc=$ rc= Supply function for demand deposits (DD) I'D = -4.00% + .0004375DD TCD = rDD = -4.00DD +.0004375D. dTCD =-4.00+.000875DD = o/ dLD DD= $ rD= % Supply function for time deposits (DT) IT = 0.00 + .00015DT TC, = rD =0.00D, +.00015D,2 dTCT = 0.00 +.0003D = % dLT DT= $ IT= %