(50 pts) 1. As an intem with the Bank of Milan, Tennessee, you have observed that this bankmakes twotypes of loans, agricultureloansand consumer loans, and offerstwotypes 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 demandfor 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 profoma 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 2, Assuming a Liability Management Bank Demand function for agriculture loans (LA) TA= 13.00%-0005LA TR -L-132-000SL DIR = 13.00--0012, -3.15% dL LA-S % TA Demand for fonction for consumer loans (L) te 9.00% 000210 TR = Le = 9.00L--0002 DTR =900 - 00041 =3 19% Les TC Supply function for demand deposits (DD) D400% +0004375DD TC = D. --400D +.0004375D, DTC -4.002.000875D-31596 dl Dp- TD Supely function for time depouts (D TE=0.00+ 00015DT TC, D +0.00D +.00015D, ATC =0.00+ 0003D=3.15% dL Des Bank of Milan, Tennessee Statement of Financial Conditions (pre forma) January 1, 2021 Assuming an Liability Management Bank US Treasury Securities SO Demand Deposits Agriculture Loans Time Deposits $ EuroDollars $ Consumer Loans Capital -2.000.00 Total Assets Total Liab & NWS Bank of Milan, Tennessee Income Statement (pro forma) January 1, 2022 - December 31, 2022 Assume all rates and balances remain constant for the next year Revenues Interest on Treasury Securities $0 Interest on Agriculture Loans $ Interest on Consumer Loans $ Total Interest Revenue $ Interest Expense Interest on Demand Deposits $ Interest on Time Deposits $ Interest on EuroDollars $ Total Interest Expense $ Net Interest Revenue (50 pts) 1. As an intem with the Bank of Milan, Tennessee, you have observed that this bankmakes twotypes of loans, agricultureloansand consumer loans, and offerstwotypes 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 demandfor 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 profoma 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 2, Assuming a Liability Management Bank Demand function for agriculture loans (LA) TA= 13.00%-0005LA TR -L-132-000SL DIR = 13.00--0012, -3.15% dL LA-S % TA Demand for fonction for consumer loans (L) te 9.00% 000210 TR = Le = 9.00L--0002 DTR =900 - 00041 =3 19% Les TC Supply function for demand deposits (DD) D400% +0004375DD TC = D. --400D +.0004375D, DTC -4.002.000875D-31596 dl Dp- TD Supely function for time depouts (D TE=0.00+ 00015DT TC, D +0.00D +.00015D, ATC =0.00+ 0003D=3.15% dL Des Bank of Milan, Tennessee Statement of Financial Conditions (pre forma) January 1, 2021 Assuming an Liability Management Bank US Treasury Securities SO Demand Deposits Agriculture Loans Time Deposits $ EuroDollars $ Consumer Loans Capital -2.000.00 Total Assets Total Liab & NWS Bank of Milan, Tennessee Income Statement (pro forma) January 1, 2022 - December 31, 2022 Assume all rates and balances remain constant for the next year Revenues Interest on Treasury Securities $0 Interest on Agriculture Loans $ Interest on Consumer Loans $ Total Interest Revenue $ Interest Expense Interest on Demand Deposits $ Interest on Time Deposits $ Interest on EuroDollars $ Total Interest Expense $ Net Interest Revenue
