You are the CEO of bank A. The bank balance sheet is as follows (numbers in millions of $): Assets Liabilities Cash 30 T-bills 175 Loans 245 Deposits 250 Euro CDs 130 Capital 70 450 450 a) (6 points) Suppose a 10% reserve requirement is imposed by the Central Bank. Are the reserves of Bank A enough to meet the Central Bank's requirement? If yes, show why. If not, suggest a possible trade. b) (4 points) Compute the financing gap of bank A. c) (5 points) Suppose that Bank A receives deposits from clients for $80 million. After receiving them, it invests $65 million in T-bills. Show the resulting balance sheet. d) (7 points) Ignore point c), i.e. Bank A's balance sheet is still the initial one: Assets Liabilities 30 Cash T-bills 175 Loans 245 450 Deposits 250 Euro CDs 130 Capital 70 450 Due to a sudden deterioration in economic conditions, you realize that $145 million loans are indeed worth only $80 million. You decide to get rid of these non-performing loans by forming a Bad Bank, and retain the proceeds of the sale as cash. Show the Good Bank balance sheet after the loan sale.

a) Reserve of Central bank are enough to meet Central Bank requirement, since calculation are as follow :-

(Numbers in millions of $)

Total Deposits of Bank-A = Deposits + Euro CD's

= 250 + 130

= 380

Reserve to be maintened imposed by central bank = 10% of Total Term deposit & Demand deposit

= 10% of 380

= 38

The above reserve amount enough , since Reserve have to be created the amount only 38, and cash & T-bills value are ( 30 + 175 = 205 ) . And because T-bill are short term money market instruments. and the T-bills are highly liluid negotiable instruments. They are available in both financial market, i.e primary and secondary market.

b) Computation of financing gap of Bank-A (numbers in millions of $)

Total Assets = Total Liabilities & Net Worth

450 = 380 + 70

Total liabilities = 380

Current liabilities = Total liabilities - Long term liabilities

=380- 380

= 0

Hence there is no financial Gap.

c) Resulting Balansheet after considering question figure

Deposit receive from clients = 80, then Total deposit = Existing + new deposit

= 250 + 80

= 330

out of 80, 65 invested in T-bills = it means cash remaining 15 then Total cash = 15+ 30( existing) = 45

Total T-bills = 65 + 175 (exissting) = 240

New Balansheet

d) Good Bank Balansheet

Total Loan = 245

Out of total loan 145 are non-perfoming is to be sale for an amount only 80.

So thre is loss = 80 -145 = -65

Profit & Loss = -65 (Loss)

Loan amount Remaining = 245 -145 = 100

Total Cash amount = 80 (by selling loan) + 30( exissting ) = 110

Then New Balansheet are as follow ;