The loan growth of a Bank is outpacing its deposit growth and the bank is facing a liquidity shortage to fund its loan activities. The loan and deposit position as at 31/12/2019 is as in Table 2 below. The Asset Liability Committee of this Bank has directed the Treasury Department to come up with a mechanism to encourage the branches to solicit deposits to meet loan demand and to measure the branches fairly. Currently the loan branches are using the deposits without compensating the deposit branches. This Bank is organized along the lines of only deposit and loan branches each conducting only one particular activity.

Table 2: The loan and deposit data for the Bank as at 31/12/2019 are as follows

	Value $ billion	Rates
Total Branch loans	45.0	Lending Rate 7.0 percent per annum
Total Deposits from Deposit Branches	45.0	Deposit Rate 3.5 percent per annum

1. Using the data provided above, calculate the net revenue and loss of the loan and deposit branches without the intervention of the Treasury Department?

2. Construct a charge/reward mechanism based on the data provided above, if Treasury Department of this Bank decides to buy all deposits at 4.5 percent per annum and sells funds to branches for loan activities at 5.5 percent per annum.

3. Explain how the mechanism implemented by the Treasury Department would assist in meeting the direction given by ALCO?

(4+5+3=12 Marks)