Question
The Jaguar Bank of Indianapolis (JBI) starts operations on January 1, 2017 issuing equity amounting $ 150. JBI advertises an annual interest of 2% for
The Jaguar Bank of Indianapolis (JBI) starts operations on January 1, 2017 issuing equity amounting $ 150. JBI advertises an annual interest of 2% for its savings deposits, paid annually, and a $ 9 a year maintenance fee for each checking account. On the first day of operations, 3 customers open checking accounts with JBI and save a total of $ 1000 in their checking accounts. The same customers save a total of $850 in their savings accounts. The bank lends $ 1250 for 3 years at an annual interest rate of 4% and another $ 350 for 10 years at an annual interest rate of 8%. It also purchases treasury bills worth $200 which earns 1% per annum. JBI maintains the required reserve (10% of checking deposit balances) at the Fed and keeps the remaining liquidity in cash reserves (currency notes and coins). Federal Reserve pays no interest on JBIs reserve account. Nor does JBI on checking accounts of its customers. JBIs operational expenses during its first year of operations is $ 70 and the corporate tax rate is 25%. Shareholders of JBI receive 10% dividends.
(a) Prepare JBIs balance sheet as at January 1, 2017 at the closure of business.
(b) Find the equity ratio and the risk-adjusted capital ratio (Basel II) and compare with the regulatory requirements. The risk weights applicable to the latter are 100% for loans and 0% for treasury bills and primary reserves.
(c) Assume one of the clients who borrowed $ 350 for 10 years defaults and the bank sells a collateral to recover $ 300. Can JBIstill comply with the capital adequacy requirements (ER and Risk-adjusted capital)?
(d) Prepare JBIs income statement after its first year of operations. Calculate ROE and ROA (Ignoring the assumption in part c).
PLEASE SHOW ALL WORK
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