978-0134733821 Chapter 9 Solution Manual

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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 119

Chapter 9

ANSWERS TO QUESTIONS

1. Why might a bank be willing to borrow funds from other banks at a higher rate than the rate

at which 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. The bank you own has the following balance sheet:

Assets

Liabilities

Reserves

$75 million

Deposits

$500 million

Loans

$525 million

Bank capital

$100 million

If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of

10%, what actions should you take?

4. If a deposit outflow of $50 million occurs, which balance sheet would a bank rather have

initially, the balance sheet in Question 3 or the following balance sheet? Why?

Assets

Liabilities

Reserves

$100 million

Deposits

$500 million

Loans

$500 million

Bank capital

$100 million

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 120

deposits). Thus, the bank would not have to alter its balance sheet further and would not

incur any costs as a result of the deposit outflow. By contrast, with the balance sheet in

question 3 the bank would have a shortfall of reserves of $20 million ($25 million in

reserves minus the required reserves of $45 million). In this case, the bank will incur costs

when it raises the necessary reserves through the methods described in the text.

5. If no decent lending opportunity arises in the economy, and the central bank pays an interest

rate on reserves that is similar to other low-risk investments, do you think banks will be

willing to hold large amounts of excess reserves?

other very low rates of safe investments like T-bills.

6. 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 that will enable you to

provide the funds your customer needs?

7. 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?

8. If a bank is falling short of meeting its capital requirements by $1 million, what three things

can it do to rectify the situation?

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 122

15. “Because diversification is a desirable strategy for avoiding risk, it never makes sense for a

bank to specialize in making specific types of loans.” Is this statement true, false, or

uncertain? Explain your answer.

16. If you are a banker and expect interest rates to rise in the future, would you prefer to make

short-term loans or long-term loans?

17. “Bank managers should always seek the highest return possible on their assets.” Is this

statement true, false, or uncertain? Explain your answer.

18. After July 2010, bank customers using a debit card had to specifically opt-in to the bank’s

overdraft protection plan. Explain the effect of this regulation on a bank’s noninterest

income.

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 123

ANSWERS TO APPLIED PROBLEMS

19. Using the t-accounts of the first national bank and the second national bank given in this

chapter, 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.

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 124

22. Excess reserves act as insurance against deposit outflows. Suppose that on a yearly basis

Malcom Bank holds $12 million in excess reserves and $88 million in required reserves.

Suppose that Malcom Bank can earn 3.5% on its loans and that the interest paid on (total)

reserves is 0.2%. What would be the cost of this insurance policy?

23. Victory Bank reports an EM of 25, while Batovi Bank reports an EM equal to 14. Which

bank is better prepared to respond against large losses on loans?

24. Suppose you are the manager of a bank whose $100 billion of assets have an average

duration of four years and whose $90 billion of liabilities have an average duration of six

years. Conduct a duration analysis for the bank, and show what will happen to the net worth

of the bank if interest rates rise by 2 percentage points. What actions could you take to

reduce the bank’s interest-rate risk?

25. Suppose you are the manager of a bank that has $15 million of fixed-rate assets, $30 million

of rate-sensitive assets, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive

liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if

interest rates rise by 5 percentage points. What actions could you take to reduce the bank’s

interest-rate risk?

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 125

ANSWERS TO DATA ANALYSIS PROBLEMS

1. Go to the St. Louis Federal Reserve FRED database and find data for all commercial banks

on total liabilities (TLBACBM027SBOG), total deposits (DPSACBM027SBOG), and residual

of assets less liabilities (RALACBM027SBOG).

a. What is the balance sheet interpretation of the residual of assets less liabilities?

b. For the most recent month of data available, use the three indicators listed above to

calculate the total amount of borrowings by banks.

2. Go to the St. Louis Federal Reserve FRED database and find data for all commercial banks

on total assets (TLAACBM027SBOG), U.S. government and agency securities held

(USGSEC), other securities held (OTHSEC), commercial and industrial loans (BUSLOANS),

real estate loans (REALLN), consumer loans (CONSUMER), interbank loans

(IBLACBM027S-BOG), other loans (OLLACBM027SBOG), and other assets

(OATACBM027SBOG). Use the most recent month of data available across all indicators.

a. What is the total amount of loans held by banks? What is this number as a percentage of

total bank assets?

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 126

c. What is the total amount of reserves and cash items? What is this number as a percentage

of total bank assets?