ULL PUILD UU) (40 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus your bank needs to acquire money market funds in the Eurodollar market at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess fund in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Use the Economics of Banking Handout for this class. The first part of this problem, using the Demand/supply functions, proves that your bank is a liability management bank. Demand function for agriculture loans (LA) r = 13.00%-.0005LA TR, - rL - 13L, -.00051 DTR - 13.00-,001L, - 3.00 IL LA=$10,000_ra= _8.0% Demand for function for consumer loans (L). rc = 9.00%-.0002LC TR = rLe = 9.00L -.00026, d1fc - 9.00 0004L = 0300 OLC Lc=$15,000_1c= _6.00% Supply function for demand deposits (DD). Ip = -4.00% +.0004375D TC, = 7D, - -4.00D, +.0004375D,? dTCD.-4.00 +.000875D, - 3.00% dLp Do= $8,000 r= -0.50% Supply function for time deposits (D). r1=0.00 +.00015D TC, =rD, = 0.00D, +.00015D, UTC -0.00+.0003D, - 3,00 dL D = $10,000 r = 1.50% Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Asset Management Bank U.S. Treasury Securities $8,000.00 $0_ Demand Deposits Agriculture Loans $10,000.00 $10.000.00_ Time Deposits $15,000.00 Capital Consumer Loans 2,000.00 Total Assets $20,000.00 $25,000.00 Total Liab & NW Therefore, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement. Demand function for agriculture loans (La). ra = 13.00% - 30005L, TR-OL-13L, -,00052 dTRA - 13.00-0014, - % DLA LA=$ ra= Demand for function for consumer loans (LC) rc = 9.00% - .0002LC TR = r2 = 9.00L - .0002L dTR - 9.00-.0004L- _% dle To Lc=$ Supply function for demand deposits (D). fp = -4.00% +.0004375D TC, = "D, - -4.00D, +.0004375D,? dTC.-4.00 +.000875D- ALD D.= $ rD Supply function for time deposits (D.). r1 = 0.00 +.00015D TC, -rD, = 0.00D, +.00015D,? TC -0,00 +.0003D, - DLY D=$ Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Liability Management Bank U.S. Treasury Securities $_ Demand Deposits Agriculture Loans Time Deposits EuroDollars $ $ Consumer Loans 2,000.00 Capital Total Assets $ Total Liab & NW Bank of Milan, Tennessee Income Statement (pro forma) October 1, 2019 - September 30, 2020 Assume all rates and balances remain constant for the next year (2020 Fiscal Year) Revenues Interest on Treasury Securities Interest on Agriculture Loans Interest on Consumer Loans Total Interest Revenue Interest Expense Interest on Demand Deposits Interest on Time Deposits Interest on EuroDollars Total Interest Expense Net Interest Revenue ULL PUILD UU) (40 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus your bank needs to acquire money market funds in the Eurodollar market at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess fund in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Use the Economics of Banking Handout for this class. The first part of this problem, using the Demand/supply functions, proves that your bank is a liability management bank. Demand function for agriculture loans (LA) r = 13.00%-.0005LA TR, - rL - 13L, -.00051 DTR - 13.00-,001L, - 3.00 IL LA=$10,000_ra= _8.0% Demand for function for consumer loans (L). rc = 9.00%-.0002LC TR = rLe = 9.00L -.00026, d1fc - 9.00 0004L = 0300 OLC Lc=$15,000_1c= _6.00% Supply function for demand deposits (DD). Ip = -4.00% +.0004375D TC, = 7D, - -4.00D, +.0004375D,? dTCD.-4.00 +.000875D, - 3.00% dLp Do= $8,000 r= -0.50% Supply function for time deposits (D). r1=0.00 +.00015D TC, =rD, = 0.00D, +.00015D, UTC -0.00+.0003D, - 3,00 dL D = $10,000 r = 1.50% Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Using the economics of banking theory covered in class, we show how the balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where you have a problem that demand for assets are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Asset Management Bank U.S. Treasury Securities $8,000.00 $0_ Demand Deposits Agriculture Loans $10,000.00 $10.000.00_ Time Deposits $15,000.00 Capital Consumer Loans 2,000.00 Total Assets $20,000.00 $25,000.00 Total Liab & NW Therefore, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement. Demand function for agriculture loans (La). ra = 13.00% - 30005L, TR-OL-13L, -,00052 dTRA - 13.00-0014, - % DLA LA=$ ra= Demand for function for consumer loans (LC) rc = 9.00% - .0002LC TR = r2 = 9.00L - .0002L dTR - 9.00-.0004L- _% dle To Lc=$ Supply function for demand deposits (D). fp = -4.00% +.0004375D TC, = "D, - -4.00D, +.0004375D,? dTC.-4.00 +.000875D- ALD D.= $ rD Supply function for time deposits (D.). r1 = 0.00 +.00015D TC, -rD, = 0.00D, +.00015D,? TC -0,00 +.0003D, - DLY D=$ Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) October 1, 2019 Assuming an Liability Management Bank U.S. Treasury Securities $_ Demand Deposits Agriculture Loans Time Deposits EuroDollars $ $ Consumer Loans 2,000.00 Capital Total Assets $ Total Liab & NW Bank of Milan, Tennessee Income Statement (pro forma) October 1, 2019 - September 30, 2020 Assume all rates and balances remain constant for the next year (2020 Fiscal Year) Revenues Interest on Treasury Securities Interest on Agriculture Loans Interest on Consumer Loans Total Interest Revenue Interest Expense Interest on Demand Deposits Interest on Time Deposits Interest on EuroDollars Total Interest Expense Net Interest Revenue