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You are the CEO of bank A. The bank balance sheet is as follows (numbers in millions of $): Assets Liabilities Cash 30 T-bills 175
You are the CEO of bank A. The bank balance sheet is as follows (numbers in millions of $): Assets Liabilities Cash 30 T-bills 175 Loans 245 Deposits 250 Euro CDs 130 Capital 70 450 450 a) (6 points) Suppose a 10% reserve requirement is imposed by the Central Bank. Are the reserves of Bank A enough to meet the Central Bank's requirement? If yes, show why. If not, suggest a possible trade. b) (4 points) Compute the financing gap of bank A. c) (5 points) Suppose that Bank A receives deposits from clients for $80 million. After receiving them, it invests $65 million in T-bills. Show the resulting balance sheet. d) (7 points) Ignore point c), i.e. Bank A's balance sheet is still the initial one: Assets Liabilities 30 Cash T-bills 175 Loans 245 450 Deposits 250 Euro CDs 130 Capital 70 450 Due to a sudden deterioration in economic conditions, you realize that $145 million loans are indeed worth only $80 million. You decide to get rid of these non-performing loans by forming a Bad Bank, and retain the proceeds of the sale as cash. Show the Good Bank balance sheet after the loan sale
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