Question

In: Finance

12. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million...

12. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core deposits.
a. Calculate the financing gap.
b. What is the financing requirement?
c. How can the financing gap be used in the day-to-day liquidity management
of the bank?

Expert Solution

a. Calculate the financing gap.

The financing gap is the gap between average loan and average deposits of the bank and can be calculated in following manner -

Financing gap = Average loans – Average deposits

Where,

Average loans = $30 million

Average deposits or core deposits = $15 million

Therefore,

Financing gap = $30 million - $15 million = $15 million

b. What is the financing requirement?

The financing requirements of the bank is financing gap plus liquid assets

Where, liquid assets are $10 million

Therefore,

Financing requirement = financing gap + liquid assets

= $15 million + $10 million = $25 million

c. How can the financing gap be used in the day-to-day liquidity management of the bank?

An increase in financing gap over a period of time is a concern for banks as it can increase future liquidity problems. In this case, there could be an increased in deposit withdrawals, therefore lenders can demand for higher risk premiums and it may restrict credit limits on the amount of funds borrowed. This way the financing gap may be used in the day-to-day liquidity management of the bank.

jeff jeffy answered 1 year ago

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