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Question

Determine the new equilibrium balance sheet and pro forms income statement.

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October 1, 2019
Assuming an Asset Management Bank
U.S. Treasury Securities
$0
Demand Deposits $8,000.00
Agriculture Loans
$10.000.00_
Time Deposits
$10,000.00
Consumer Loans
$15,000.00
Capital
2,000.00
Total Assets
$25,000.00
Total Liab & NW $20,000.00
Therefore, you need to start over assuming a liability management bank. Determine the new
equilibrium balance sheet and proforma income statement.
Demand function for agriculture loans (LA)
TA = 13.00% - .0005LA
TRA = rL =13LA -.000514
dTRA = 13.00-.001LA =
dLA
%
LA=$
TA=_
Demand for function for consumer loans (LC)
rc =9.00% - .0002Lc
TRe = rLc =9.00Lc -.0002L'c
dTRC = 9.00-.0004Lc =
o/c
dLc
Lc=$
rc=
Supply function for demand deposits (DD)
I'D = -4.00% + .0004375DD
TCD = rDD = -4.00DD +.0004375D.
dTCD =-4.00+.000875DD =
o/
dLD
DD= $
rD=
%
Supply function for time deposits (DT)
IT = 0.00 + .00015DT
TC, = rD =0.00D, +.00015D,2
dTCT = 0.00 +.0003D =
%
dLT
DT= $
IT=
%

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E
Financial Institutions Management
(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)
TA = 13.00% - .0005LA
TRA = rL =13L, -.00052
dTRA = 13.00-.001L, = 3.00
dLA
LA=$10,000 rA= _8.0%_
Demand for function for consumer loans (Lc)
rc = 9.00% - .0002Lc
TR = rLc =9.00Lc -.0002Lc
dTRC = 9.00-.0004Lc =.0300
dLc
Lc=$15,000_rc= _6.00%_
Supply function for demand deposits (DD)
I'D =-4.00% + .0004375DD
TCD = rDD =-4.00D, +.0004375DD
dTCD = -4.00+.000875D, = 3.00%
dLD
DD= $8,000
ID= =0.50%
Supply function for time deposits (DT)
IT = 0.00 + .00015DT
TC = ID =0.00D +.00015D,2
dTCT = 0.00 + .0003D, = 3.00
dLT
DT= $10,000
IT= 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)

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