Question

(a) Explain the following bank management activities: liquidity management, asset management, liquidity management, capital adequacy management, credit risk management, interest-rate risk management.

        Consider the Loan Shark Bank (LSB) with the balance sheet shown below, which is subject to a 10 percent required reserves ratio. Use this information to answer parts (b) and (c).

Assets	Liabilities
Reserves                       $20	Deposits                                  $100
Loans                            $80	Loans from Comm. Banks $ 10
Securities                      $30	Loans from the Fed                 $ 10
	Bank Capital                            $ 10

(b) Given the information about LSB, consider the following two transactions. First, John deposits $2 in LSB. Then, Juan withdraws $5 from his savings account at LSB. Use a T-account to represent the changes in the LSB balance sheet from each transaction—that is, you need to show two T-accounts. Then, show LSB balance sheet after both transactions have taken place.

(c) Given the information about LSB—discard the transactions from part (b)—, could LSB remain in business if it suffers a 10 percent loss in its securities? Explain your answer and show the resulting LSB balance sheet if this scenario occurs

Answer 1

(1)

Effect of the first transaction and its balance sheet effect will be as under

Deposit
		Balance	100
		Deposit	2
		Withdrawal	-5
Balance C/F	97
	97		97

due to movement in the cash the reserve amount will be chage the effect are as under

Reserve
Balance	20
Deposit	2
Withdrawal	-5
		Balance C/F	17
	17		17

New Balance sheet will be as under

Assets		Liabilities
Reserves	17	Deposits	97
Loans	80	Loans from Comm. Banks	10
Securities	30	Loans from the Fed	10
		Bank Capital	10
Total	127	Total	127

(2)

Due to 10 percent loss in its securities, the securities balance would be fall down to the 27 now due to it the bank capital might change

Security
Balance	30
Loss	-3
		Balance C/F	27
	27		27

Capital
		Balance	10
		Deposit	-3
		Withdrawal	7
Balance C/F	7
	7		7

Assets		Liabilities
Reserves	20	Deposits	100
Loans	80	Loans from Comm. Banks	10
Securities	27	Loans from the Fed	10
		Bank Capital	3
Total	127	Total	123