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Question 3 Suppose Happiness Bank has the following balance sheet Assets (in millions) Reserves Loans Securities Liabilities (in millions) 20 Deposits 200 180 Bank capital
Question 3 Suppose Happiness Bank has the following balance sheet Assets (in millions) Reserves Loans Securities Liabilities (in millions) 20 Deposits 200 180 Bank capital 50 50 a. Calculate the equity multiplier for Happiness Bank. Suppose on average the assets of Happiness Bank have a return of 8%, what is the rate of return to the shareholders of the bank? (10%) b. Suppose the reserve requirement is 10% and there is an outflow of 10 million in deposits. How can the bank eliminate the shortfall in the reserves? Please give one solution and update the balance sheet based on your solution. (30%) c. Suppose 150 million of the bank loans have variable interest rate and 100 million of the deposits have variable interest rate, how would the profit of the bank be affected by a decrease in the interest rate? Is there any way to reduce the interest rate risk? (30%) d. Explain the trade-off between liquidity and profitability for banks. (30%)
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