i) Star Bank offers consumer loans with a 5 per cent base rate, charges a 0.25 per cent loan origination fee, imposes a 15 per cent compensating balance requirement and must pay a 5.5 per cent reserve requirement to the central bank. The loans typically are repaid at maturity. Calculate the loans annual gross return, assuming the risk premium on consumer loans is 1.5 per cent (show all workings).

ii) Explain how your answer from part A will change if the regulators increase the reserve requirement.