StarBank has the following balance sheet (in millions):

Assets		Liabilities and Equity
Cash required reserves	$2	Deposits	$8
Loans	$10	Long-term debt	$2
		Equity	$2
Total assets	$12	Total liabilities and equity	$12

The average interest earned on the loans is 4.1 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to induce a net deposit drain of +38.9 percent. Borrowing more debt will cost the bank 5.5 percent in the short term.

a) What will be the cost of using a strategy of purchased liquidity management to manage the deposit drain?

b) What will be the size of the bank if a purchased liquidity management strategy is adopted?

(Enter your answers in millions, not in dollars, e.g. one million should be entered as 1 not as 1,000,000, and round your answers to 2 decimals, if applicable. Negative amounts should be indicated by a minus sign where applicable.)

Answer rating: 100% (QA)

a The cost of using a strategy of purchased liquidity ... View the full answer