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Given the balance sheet of Bank A and Bank B below (all figures in $ million): Bank A Reserve 50 Transaction Deposits 200 Securities 50
Given the balance sheet of Bank A and Bank B below (all figures in $ million):
Bank A | |
Reserve 50 | Transaction Deposits 200 |
Securities 50 | Non-transaction Deposits 600 |
Loans to Government 900 | Borrowings 100 |
| Equities 100 |
Total Assets 1,000 | Total Liabilities & Equities 1,000 |
Bank B | |
Reserve 20 | Transaction Deposits 200 |
Securities 10 | Non-transaction Deposits 600 |
Loans to Commercial Firms 970 | Borrowings 100 |
| Equities 100 |
Total Assets 1,000 | Total Liabilities & Equities 1,000 |
- Based on the balance sheet structure of the two banks, can we conclude that the two banks are equally safe? (10 marks)
- Suppose both Bank A & B have given a line of credit to a corporate customer of $20 million. Show the impact on the balance sheet of both banks if the customer draws on the line of credit by writing a cheque to its supplier. Which bank will face a higher risk with respect to the off-balance sheet commitment and what kind of risk is it if the required reserve ratio is 10%? (15 marks)
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