Order Banking and the Management of Financial Institutions

Order Banking and the Management of Financial Institutions
1. Why might a bank be willing to borrow funds from
other banks at a higher rate than it can borrow from
the Fed?
*2. Rank the following bank assets from most to least liquid:
a. Commercial loans
b. Securities
c. Reserves
d. Physical capital
3. Using the T-accounts of the First National Bank and
the Second National Bank, describe what happens
when Jane Brown writes a $50 check on her account
at the First National Bank to pay her friend Joe Green,
who in turn deposits the check in his account at the
Second National Bank.
*4. What happens to reserves at the First National Bank if
one person withdraws $1,000 of cash and another
person deposits $500 of cash? Use T-accounts to
explain your answer.
5. The bank you own has the following balance sheet:
If the bank suffers a deposit outflow of $50 million
with a required reserve ratio on deposits of 10%, what
actions must you take to keep your bank from failing?
Order Banking and the Management of Financial Institutions
*6. If a deposit outflow of $50 million occurs, which balance sheet would a bank rather have initially, the balance sheet in Problem 5 or the following balance
sheet? Why?
7. Why has the development of overnight loan markets
made it more likely that banks will hold fewer excess
reserves?
*8. If the bank you own has no excess reserves and a
sound customer comes in asking for a loan, should
you automatically turn the customer down, explaining
that you don’t have any excess reserves to lend out?
Why or why not? What options are available for you
to provide the funds your customer needs?
9. If a bank finds that its ROE is too low because it has
too much bank capital, what can it do to raise its ROE?
*10. If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to
rectify the situation?