Question

In: Finance

      An FI has the following Balance Sheet (in millions of dollars):                         Assets&nbs

      An FI has the following Balance Sheet (in millions of dollars):

                        Assets                                      Liabilities and Equity

                        Cash                $40                  Deposits          $135

                        Loans              $100                Equity             $15

                        Securities        $10                  

   The FI is expecting a $50 million net deposit drain. Show the FI's new balance sheet if:

  1. The Stored Liquidity method is used to meet the liquidity shortfall
  2. The FI purchases liabilities to offset this expected drain.

Solutions

Expert Solution

a. The Stored Liquidity method is used to meet the liquidity shortfall.

The $ 50 million drain reflects on the deposits and cash and securities are used to meet this. (Cash $ 40 mln and securities $ 10 mln)

FI's new balance sheet:

Assets                                      Liabilities and Equity   

                        Loans              $100                Equity $15

      Deposits          $ 85

Total Assets $100 Total liabilities and equity $ 100

b. The FI purchases liabilities to offset this expected drain.

The $ 50 million drain reflects on the deposits and liabilities are purchased.

Assets                                      Liabilities and Equity

                        Cash                $40                  Deposits          $ 85

                        Loans              $100                Equity             $15

Securities        $10        Purchased liabilities $ 50       

Total Assets $150 Total liabilities and equity $ 150

jeff jeffy answered 1 year ago
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