a. Suppose you are the executive management team for XYZ Bank. b. The basic operation of your
Question:
a. Suppose you are the executive management team for XYZ Bank.
b. The basic operation of your bank is to get deposits at X% and sell loans as X%+Y%. You operate in only 1 state and you have 30% share in this market. There are only 2 other banks in this state, each with just 5% share and no new market entrants are in sight (however, you may want to expound on what if there were new competitors trying to break into this market). There are no government regulations to stop any of your operations (current or expansion efforts). Assume that interest rates will not change in the next year or so (although you may want to make considerations if interest rate environment goes up).
c. Right now X% ranges between 0.1% through 0.5%. Y% ranges from 0.5% through 1%.
d. You currently have a portfolio of $100million in total deposits, all paying your customer 0.1%. You can generate additional $50million in deposits by raising your deposit rate to 0.3% on the new deposits up to $75million. You could also generate more deposits after $75million up to another $100million by paying the depositor 0.5% on these new deposits after $75million is reached.
e. The challenge for your management team is that your board of directors and stockholders are displeased with your current loan pricing of 1.5%, i.e. you're generating operating incomes of only 1.4% (remember you're paying your $50million in deposits at 0.1% and each deposit dollar is fully invested in loans at 1.5%, i.e. you also have $50million in loans). You can increase your loan pricing on new loans at 2%, but the risk for these tens are double what you already are incurring for your current portfolio of $50million in loans.
f. Thus, you have to find a way to increase your operating income by the following strategies: i. increase your loans, by paying up on the additional deposits. Remember, you can buy new deposits, but your prices for the additional deposits are at a price premium as applied in lc-d. ii. increase your returns by investing in mutual funds where every dollar will return 4%, but your risk is going to quadruple.
Write a basic Business Strategy Plan in which you address the following:
a. Executive Summary
b. How would you grow your bank? Make sure you include the principles of Economics in your strategy. Cite as many laws and concepts from the text that you think are applicable (make sure your plan is consistent with these laws and principles). Explain all the economic theories you use. i. Are you acquiring more deposits so you can loan them out? ii. Are you going to invest in just loans, just mutual funds or a combination of both? iii. Will you consider going out of your current single state market? iv. How will you justify the additional risks involved in the additional loans or mutual finds that you're planning to grow your bank?
c. What are your short-run and long-run plans? Assume you can increase your capital and labor with no adverse impact on your operating incomes (i.e. you haven't reached your region of diminishing return).
Economics Principles and Policy
ISBN: 978-0538453653
12th edition
Authors: William J. Baumol, Alan S. Blinder