MONEY AND BANKING

Instructions:

• Answer all questions
• Late assignment will not be accepted.
• Get to the point. Be clear and concise.
• You may submit the assignment in a group of up to four students. Make sure you indicate clearly the names and IDs on the cover page of the assignment.

Question 1:

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, established in 1987 to contribute to the safety and soundness of the Canadian financial system. OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight.

Go to OSFI website - under Financial Institutions - select Financial Data - select Banks. Populate the most recent consolidated balance sheet of the bank of your choice, and attach a printout.

a) What is the total amount of loans held by the bank? Use “total currency”.

b) What is this number as a percentage of total bank assets?

c) Calculate the Equity Multiplier.

d) Would you buy the share of this bank as an investment? Explain

Question 2:

Bank AAA has $15 million of fixed-rate assets, $30 million of rate-sensitive assets,
$25 million of fixed-rate liabilities, $20 million of rate-sensitive liabilities, 5 million of demand deposit, 10 million of securities, and 0.6 million of reserves. Assume that the required reserve is 10%.

a. Reflect the above information in a T account. How much is the Net worth?

b. Calculate the required reserve and the excess reserve if any,

c. Conduct income gap analysis for the bank, and show what will happen to bank income if interest rates rise by 5%?

d. What would happen if the interest rates fall by 5%?

e. What actions should the bank manager take if interest rates are expected to fall?

Question 3:

The following is City Bank T account

Assets                      Liabilities and Capital

Rate sensitive Assets               Rate Sensitive Liabilities
                $100                           $75

a. Assuming a decrease of 5% in interest rates (from 10% to 5%) for both assets and liabilities, calculate the change in the market value of the net worth as a percentage of total assets. Assume an average duration of 4 years for the rate-sensitive assets and an average duration of 2 years for the rate-sensitive liabilities.

b. What if interest rates increased by 3% (from 10% to 13%).

c. What strategy should the Bank Manager follow to alleviate the risk if interest rates increase?