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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
Copyright © 2019 by Pearson Education, Inc. All rights reserved.
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?
