Part 1

(50 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes twotypes of loans, agricultureloansand consumer loans, and offerstwo 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 proforma 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 acquiremoney market deposits, show what the pro-formabalance 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) TA= 13.00% - 0005LA TR - PL-13L-000SL TR = 13.00 - 001L, 3.00 dla LA-S10,000_1A= 8.0% Demand for function for consumer loans (LC) TC=9.00%-0002LC TR=rc=9.00LC-10002L =9.00-0004L0 = 3.00 dl Lc-$15,000 rc- 6.00% TRC Supply function for demand deposits (DD) ID = 4.00% +.0004375DD TCp=rDo = -4.00D, +.0004375D,? DTC) -4.00+.000875D, = 3.00% 2 dlo r= -0,50% Dp-$8,000 Supply function for time deposits (DT) rT=0.00+ 00015DT TC =rD, =0.00D, +.00015D, TC =0.00+.0003D, = 3.00 dl, Di=$10,000 r= 1.50% 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 probletn 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 U.S. Treasury Securities S0 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 ples 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% (50 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes twotypes of loans, agricultureloansand consumer loans, and offerstwo 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 proforma 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 acquiremoney market deposits, show what the pro-formabalance 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) TA= 13.00% - 0005LA TR - PL-13L-000SL TR = 13.00 - 001L, 3.00 dla LA-S10,000_1A= 8.0% Demand for function for consumer loans (LC) TC=9.00%-0002LC TR=rc=9.00LC-10002L =9.00-0004L0 = 3.00 dl Lc-$15,000 rc- 6.00% TRC Supply function for demand deposits (DD) ID = 4.00% +.0004375DD TCp=rDo = -4.00D, +.0004375D,? DTC) -4.00+.000875D, = 3.00% 2 dlo r= -0,50% Dp-$8,000 Supply function for time deposits (DT) rT=0.00+ 00015DT TC =rD, =0.00D, +.00015D, TC =0.00+.0003D, = 3.00 dl, Di=$10,000 r= 1.50% 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 probletn 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 U.S. Treasury Securities S0 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 ples 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%