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# Banks and interest rates and capital requirements

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Chapter 17 Questions
5. If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?

12. If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

15. If a bank is falling short of meeting its capital requirements by \$1 million, what three things can it do to rectify the situation?

Quantitative Questions
2. X-band reported an ROE of 15% and an ROA of 1%. How well capitalized is this bank?

Chapter 20 Questions
5. What are the costs and benefits of a too-big-to-fail policy?

7. Why does imposing bank capital requirements on banks help limit risk taking?

Quantitative Problems
1. Consider a failing bank. A deposit of \$150,000 is worth how much if the FDIC uses the payoff method? The purchase and assumption method? Which is more costly to taxpayers?

2. Consider a bank with the following balance sheet:
Assets Liabilities
Required reserves \$8 million Checkable deposits \$100 million
Excess reserves \$3 million Bank capital \$6 million
T-bills \$45 million
Mortgages \$40 million
Commercial loans \$10 million

Calculate the bank's risk-weighted assets?

#### Solution Preview

Chapter 17 Questions
5. If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
I would make short-term loans. When the creditors pay off these loans, I would give it on loan again at higher interest rate. For example, if I expect the interest rates to go up from current level of 8% to 10% in next 6 months. I would extend the short term loans currently at 8% for 6 months and once these mature I will give loans at the 10% interest rate.

12. If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
If the capital is doubled and ROA stays constant, the ROE will decrease.

15. If a bank is falling short of meeting its capital requirements by \$1 million, what three things can it do to rectify the situation?
1. Raise new capital though fresh issue of equity
2. If the bank is paying dividends currently in excess of \$1 million, the second option is to cut the dividends payments by \$1 million.
3. Decrease the assets (or risk weighted assets) so that ...

#### Solution Summary

The solution examines the banks and interest rates for capital requirements.

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