You have a bank with the following information:
Assets	$M	Liabilities	$M
Cash	200	Retail Deposits	450
Consumer Loans	550	Subordinated Debt	225
		Equity	75
Total Assets	750	Total Liabilities & Equity	750
Rising interest rates due to Fed policy will pose a $175M drain on retail deposits next year
a. The bank's average funding cost of retail deposits is 4% and note rates on loans is 5.5%.
The bank wants to lower its loan portfolio to offset the drop in deposits. What impact
would this have on net interest income and the balance sheet after this decision is made?
Change in NII
Change in size of the bank
b. Assume rates on new debt issuances are 4.5%
What is the impact on net interest income of offseting the deposit drain
with an increase in new debt?
Change in NII
c. What is the size of the bank after this strategy is employed?
Change in size of bank

Answer rating: 100% (QA)

a To offset the drop in deposits the bank plans to reduce its loan portfolio We need to calculate th... View the full answer