Question

1.) You are the CEO of a bank. Back in November, you were able to foresee the economic distress that Covid 19 would cause (the drop in economic activity and lower interest rates, for example).

What actions (give at least 2-3) did you take to both reduce various types of risk banks face and to limit the impact on bank profitability?

2.) Within the IS-LM model, the upward sloping LM curve is derived based on the assumption that "The Fed" controls the money supply, what is known as exogenous money. Can the Fed control the money supply?

Your response should include a discussion about the money multiplier process and bank behavior in general.

Answer 1

1. As risks mitigation process, the banks must ensure new policies on defaults by placing extensive backgrounds research for loans sanctioning and higher down payment terms with collateral of higher value to avoid insolvency and bankruptcy alongwith strong risk management frameworks and ethical audit to eliminate bad loans amd non performance assets. Also lowering deposit rates and charging higher rates for loans will improve profitability overall.
2. Fed can control exogenous money supply through printing of additional currency and open market operations by bond buying programmes and cuts into interest rates, reverse repo rates amd cash liquidity ratio and statutory liquidity ratios. This causes higher credit availability and better spread causing higher disposable incomes and consumption which gives philipp to aggregate demand and real GDP in large.