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Integrated Mini Case

MEASURING LIQUIDITY RISK

A DI has the following balance sheet $($in millions$)$:

The DI's securities portfolio includes $$16$ million

in T$-$bills and $$10$ million in GNMA securities$.$ The

DI has a $$20$ million line of credit to borrow in the

repo market and $$5$ million in excess cash reserves

$($above reserve requirements$)$ with the Fed. The DI

currently has borrowed $$22$ million in Fed funds

and $$18$ million from the Fed discount window to

meet seasonal demands.

Calculate the financing gap.

What is the financing requirement?

The DI expects a net deposit drain of $$20$ mil$-$

lion. Show the DI's balance sheet if the following

conditions occur:

a$.$ The DI purchases liabilities to offset this

expected drain.

b$.$ The stored liquidity management method

is used to meet the expected drain $($the DI

does not want the cash balance to fall below

$$5$ million, and securities can be sold at their

fair value$).$

In the event of an unexpected and severe drain

on deposits in the next $3$ days and $10$ days, the

DI will liquidate assets in the following manner:

Calculate the $3-$day and $10-$day liquidity index for

the DL$.$