Purchase Solution

Banks and interest rates and capital requirements

Not what you're looking for?

Ask Custom Question

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?

Attachments
Purchase this Solution
Solution Summary

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

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 ...

Purchase this Solution
Free BrainMass Quizzes
Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Operations Management

This quiz tests a student's knowledge about Operations Management

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

View More Free Quizzes
Related BrainMass Solutions

  • Is it true that banks won't lend until interest rates go up?

    All the news about interest rates and the power of the Federal Reserve Board relates directly to the amounts and interest rates that commercial banks pay to borrow from the 'fed'.

  • Montary policy's tools for benchmark interest rates

    Reserve requirements: Requirements regarding the amount of funds that banks must hold in reserve against deposits made by their customers. Increasing these requirements decreases the amount banks can lend, and vice versa.

  • Money vs Capital Markets

    Consider in your analysis the types and significance of the links between the money and capital markets via the term structure of interest rates, issuers of debt and equity and the presence of interest rate and credit risk derivatives.

  • Instruments of Monetary Policy

    Explain how the Fed through its policies and tools, affects overall prices, output, employment, and interest rates?

  • Expansionary and Contractionary Monetary Policy

    When interest rates are lower, the cost of financing capital projects is less. So all else being equal, lower interest rates lead to higher rates of investment.

  • bank reserves, the money supply, interest rates, and aggregate demand

    The central bank influences interest rates by expanding or contracting base money, which consists of currency in circulation and banks' reserves on deposit at the central bank.

  • Monetary Policy

    Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment

  • Fed changes discount rates

    (tutor2u, 2009) Other problems are lags in monetary policy, presence of financial intermediaries, contradiction in objectives and underdeveloped nature of money and capital markets.

  • Acme Company

    Since the other two are aggressive banks, any increase in the interest rates will cause BOA, and Citibank to increase their interest rates as well.

View More Related Solutions