Fractional Reserve Banking

1. Assume Bank A receives $181 in loans from the Fed and the reserve requirement is 7.00%. In the following table write out the money multiplication process. Only write out the money multiplication process until Bank E but calculate the Total as if you continued the multiplication process until reserves hit zero and there is nothing left to lend.

Table 1

 

Bank

Deposits

Loans

Reserves

 

A

 

B

 

C

 

D

 

E

 

 

Total

2. How much actual money is there in the banking system, M0, and how much demand deposits are there in the banking system, M1? How much money was created through lending?

1. If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?

2. X-Bank reported an ROE of 13.00% and an ROA of 1.00%. How well capitalized is this bank?

3. Below is the balance sheet for Tribank. The required reserve ratio is 11.00%. Deposits fall by $5. What does the new balance sheet look like? How much money does the bank need to meet required reserves if any?

Table 2

Assets Liabilities

 

Required Reserves

 

$11 Checkable Deposits

 

$100

 

Excess Reserves

 

$3 Bank Capital $6

 

T-bills $45

Loans $50

 

4. To meet any shortfall in the previous question, TriBank will borrow the cash in the fed funds market. What does the balance sheet look like after this transaction?

Chapter 18

1. Consider a failing bank and assume the FDIC insures up to $250,000. A deposit of $642,803 is worth how much if the FDIC uses the payoff method? The purchase and assumption method?

2.

a. Based on the balance sheet below, how well capitalized is the bank?

b. How well capitalized is the bank based on the risk-weighted capital ratio?

Table 3

Assets Liabilities

 

Required Reserves

 

$3 Checkable Deposits

 

$124

 

Treasury Securities

 

$50 Bank Capital $12

 

Loans $83

Shadow Banking

1. Discuss ways that private equity funds can create value?

 

Use Table 2 below for number 8. Assume the management fee is 2.00%, committed capital is $100, and the carried interest is 11%.

2. Fill in the rest of the table.

Table 4

 

Year

Called-down

Paid in capital

Mgmt   Fees

Operating

Results

NAV before

Distributions

Carried

Interest

Distributions

NAV after

Distributions

 

2010

$21

-$10

 

2011

$26

$10

 

2012

$16

$20

 

2013

$10

$50

$5

 

2014

$27

$55

$10

3. What are the ways the fund of funds create value. In addition, what kind of performance does the fund of funds usually obtain?

 

Answer the next question(s) on the basis of the following table for a commercial bank or thrift:

Table 5

 

Reserve   Requirement

Deposits

Total   Reserves

Excess   Reserves

 

1

W

$95,861

$8,035

$1,000

 

2

10%

X

$20,000

$3,966

1. Refer to row 1 in the above table. The number appropriate for space W is:

2. A. 8.38%

B. 7.34%

C. 12.45%

D. 57.34%

3. Refer to row 2 in the above table. The number appropriate for space X is:

4. A. $161,590

B. $239,660

C. $200,000

D. $160,340