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Suppose further that the interest rate on loans is rloans = 0.12, the interest rate on the government issued bonds is r f = 0.03.
Suppose further that the interest rate on loans is rloans = 0.12, the interest rate on the government issued bonds is r f = 0.03. The deposits in turn, pay an interest of rde p = 0.02. However, there is risk associated with the bank's liabilities. In particular, there is a probability p that 40% of the deposits are suddenly withdrawn by the depositors. If such an event where to happen, the bank would first use its cash reserves to meet depositors demand. If reserves prove insufficient, then the bank would sell government issued debt at face value (i.e., without any discount on the sale price). If, in turn, this is not enough to meet the depositors' withdrawals, then the bank would be forced to sell some of its loans accepting a discount of 50% (this means, for example, that if the bank wanted to raise $20 in cash selling loans, it would have to sell $40 worth of loans)
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