Money and Banking

  1. Based on the information provided below about banks A and B, compute for each bank its return on assets
    (ROA), return on equity (ROE) and leverage ratio.
    a. Bank A has net profit after taxes of $1.8 million and the balance sheet below:
    Bank A
    (in millions)
    Assets Liabilities
    Reserves $5 Deposits $100
    Loans $70 Borrowing $10
    Securities $45 Bank Capital $10
    b. Bank B has net profit after taxes of $0.9 million and the balance sheet below:
    Bank B
    (in millions)
    Assets Liabilities
    Reserves $7.5 Deposits $75.0
    Loans $55.0 Borrowing $3.0
    Securities $23.5 Bank Capital $8.0
  2. Explain how a bank uses liability management to respond to a deposit outflow. Why do banks prefer liability
    management to asset management?

FRED QUESTIONS

  1. Are U.S. banks increasing in size? Use FRED to plot since 1984 on a quarterly basis the number of U.S.
    commercial banks (FRED code: USNUM) and, on the right scale, the volume of their deposits (FRED code:
    DPSACBM027SBOG). Download the data and compute the average deposit size of banks in the first quarters
    of 1984 and 2016.
  2. What share of U.S. banks fail? Plot since 2000 the fraction (in percent) of bank failures (FRED code:
    BKFTTLA641N) relative to the number of banks (FRED code: USNUM). Comment on the timing and the
    proportion of failures. Were most of the failing banks large or small?

Sample Solution

ACED ESSAYS