Question
The following is the balance sheet of AUS Bank (in $ millions): (2 marks) Assets Liabilities and Equity Cash 20 Deposits 60 Loans 80 Non-deposit
The following is the balance sheet of AUS Bank (in $ millions): (2 marks)
Assets Liabilities and Equity
Cash 20 Deposits 60
Loans 80 Non-deposit borrowings 42
Fixed assets 10 Equity 8
Total 110 Total 110
The market interest rate is expected to decrease by 1% over the coming week. This causes a drain of $ 10 million deposits. The liquidity management committee is to offset this deposit withdrawal by selling a portion of its loan portfolio. Loans have an average life of 2 years and the average interest rate attached to loans is 11 percent. Loans are not amortized; that is, principal is paid at maturity. Given this information, answer the following questions:
- How much of loans does the bank need to sell in order to offset fully the deposit withdrawal?
- What would be the impact of this transaction on bank balance sheet structure? (Draw a new balance sheet)
- Assume that the bank will have to discount loans at 20 percent if they are to be sold in less than one week. Because of this, the bank decided to address only 40% of the withdrawal from selling loans and 60% remaining from its cash item. How much of loans does now the bank need to sell in order to offset fully the deposit withdrawal?
- What would be the impact of this transaction (from part c) on bank balance sheet structure? (Draw a new balance sheet)
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