Banks’ BS operations

The following questions relate to the first month’s operation of FB Bank.

1. FB Bank started its first day of operations with $6m in capital. $100m in checkable deposits is received.
The bank issues a $25m commercial loan and another $25m in mortgages, with the following terms.
 Commercial loan: 20-year loan with a nominal annual rate of 9%, equally monthly rates.
 Mortgages: 100 standard 30-year fixed-rate mortgages with a nominal annual rate of 5.25% each for
$250,000, equally monthly rates.
If required reserves are 8%, what does the bank’s balance sheet look like?

Requires Reserves = 8% * Checkable Deposits = 8% * $100 million = $ 8 million

Assets Liabilities
Required Reserves $ 8 million Checkable Deposits $100 million
Excess Reserves $48 million Bank Capital $ 6 million
Loans $50 million
Total Assets $106 million Total Liabilities $106 million

2. FB Bank decides to invest $45m in 30-day T-bills. The T-bills are currently trading at$4986.70
(including commissions) for a $5,000 face value instrument. How many T-bills do they purchase?
What does the balance sheet look like?
The bank can purchase $45 m/$4,986.70, which is about 9,024 T-bills. The actual cost is
$44,999,980.80.
After the transaction, the balance sheet is:
Assets Liabilities
Required Reserves $ 8 million Checkable Deposits $100 million
Excess Reserves $ 3 million Bank Capital $ 6 million
T-bills $45 million
Loans $50 million
Total Assets $106 million Total Liabilities $106 million

3. On the third day of operations, deposits fall by $5m. What does the balance sheet look like? Are there
any problems (RMO)?
The cash leaving the bank comes from reserves, first excess ($3 million) and then required ($2 million).
Following the outflow, the balance sheet is:
Assets Liabilities
Required Reserves $ 6 million Checkable Deposits $95 million
T-bills $45 million Bank Capital $ 6 million
Loans $50 million
Total Assets $101 million Total Liabilities $101 million
With $95 million in deposits, the 0.08  $95 M is required in reserves, or $7.6 million.
 The bank is short $1.6 million in reserves.

4. To meet any shortfall in the previous question, FB Bank will borrow the cash in the federal funds
market. Management decides to borrow the needed funds for the remainder of the month (now 29
days). The interest rate is 2.9%. What does the balance sheet look like after this transaction?
 Assets Liabilities
Required Reserves $7.6 million Checkable Deposits $ 95 million
T-bills $ 45 million Fed Funds Borrowed $1.6 million
Commercial Loan $ 25 million Bank Capital $ 6 million
Mortgages $ 25 million
Total Assets $102.6 million Total Liabilities $102.6 million

5. The end of the month finally arrives for FB Bank, and it receives all of the required payments from its
mortgages, commercial loans and T-bills. How much cash is received? How are these transactions
recorded?

Rate (Principal) for Commercial Loan: 25 mil./(2012) = 0.104166 mil.

Interest Income for Commercial Loan: 25 mil. 9%  (1/12) = 0.187500 mil.
Rate (Principal) for Mortgages: 25mil. / (3012) = 0.069444 mil.
Interest Income for Mortgages: 25 mil.  5.25%  (1/12) = 0.109375 mil.

Debit Credit
Cash $470,485 Interest Income $296,875
Loans rates $173,610

The T-bills paid: 9,024  $5,000 = $45,120,000.

Income from T-bills: 9,024  ($5,000 - $4986.70) = 9,024  ($13.3) = $120,019.20

Debit Credit
Cash $45,120,019.2 T-bills $ 45 million
Income from T-bills $120,019.20

6. FB Bank pays off its federal funds borrowed. How much cash is owed? How is this recorded?

Interest Expense on Fed funds borrowed: 1.6 mil. 2.9%  (29/365) = 0.187500 mil.

Debit Credit
Fed Funds $1,600,000 Cash $1,603,686.58
Interest Expense $ 3,686.58

7. FB Bank also pays the interest for customers’ deposits which interest rate is 4%. How is this recorded?

Interest Expense on Customer Deposits: 95 mil. 4%  (1/12) = 0.316,666 mil.

Debit Credit
Interest Expense $ 316,666.66 Cash $ 316,666.66

8. What does the month-end balance sheet for FB Bank look like?

Commercial Loans = Initial loan – Rate = 25,000,000 – 104,166 = 24.895.834

Mortgages = Initial loans – Rates = 25,000,000 – 69,444 = 24,930,556
Rezerve in exces = Cash into – Cash out = (470,485 + 45,120,019.2) – (1,603,686.58 + 316,666.66)
=43,670,150
 Capital = Initial Capital + (Income – Expenses) = 6,000,000 + (296,875 + 120,019.20) – (3,686.58 +
316,666.66) =6,096,540

Assets Liabilities
Required Reserves $7.6 million Checkable Deposits $ 95 million
Excess Reserves $43.670 million Bank Capital $ 6.096 million
Commercial Loan $ 24.896 million
Mortgages $ 24.930 million
Total Assets $101.096 million Total Liabilities $101.096 million

9. Next month FB Bank attracts deposits from customers 15 mil. $ (3 month maturity, 4% interest rate)
and from the interbank market 5 mil. $ (2 month maturity, 3.5% interest rate). Should the Required
Reserves modify? What does the balance sheet look like?

With $110 million in deposits, 0.08  $110 M is required in reserves, or $8.8 million.
 The bank is short $8.8 - $7.6 = $1.2 million in reserves, which will be covered from Excess
Reseves
 Excess Reseves = $43.670 million - $1.2 million + $15 million + $5 million = 62.470 million

Assets Liabilities
Required Reserves $8.8 million Checkable Deposits $ 110 million
Excess Reserves $62.470 million Deposits from other banks $ 5 million
Commercial Loan $ 24.896 million Bank Capital $ 6.096 million
Mortgages $ 24.930 million
Total Assets $121.096 million Total Liabilities $121.096 million

10. New supervisory regulations of central bank require banks to establish a Credit risk reserve at 0.25% of
the loans’ value. How would this be recorded? Recalculate balance sheet.

Credit risk reserve = Loans’ balance * Reserve coefficient = (24.896 + 24.930) mil. $ * 0.25% =
0.124,565 mil. $

Debit Credit
Expenses with Credit risk reserve 0.125 Credit risk reserve 0.125

Assets Liabilities
Required Reserves $8.8 million Checkable Deposits $ 110 million
Excess Reserves $62.470 million Deposits from other banks $ 5 million
Commercial Loan $ 24.896 million Reserve for credit risk $ 0.125 million
Mortgages $ 24.930 million Bank Capital $ 5.971 million
Total Assets $121.096 million Total Liabilities $121.096 million

11. Due to the worsening of financial performance of 10 mortgage debtors FB Bank is required to establish
an Allowance for Loan Loss reserve at 20% of the doubtful loans value. How would this be recorded?
Recalculate FB Bank’s balance sheet.

Allowance for Loan Loss = Doubtful loans’ balance (NPLs) * ALL coefficient = (10 doubtful contracts/100
contracts) * 24.930 million $ * 20% = 0.499 mil. $
 Debit Credit
Allowance for Loan Loss $ 0.499 million Mortgages $ 0.499 million

Assets Liabilities
Required Reserves $8.8 mil Checkable Deposits $ 110 mil
Excess Reserves $62.470 mil Deposits from other banks $ 5 mil
Commercial Loan $ 24.896 mil Reserve for credit risk $ 0.125 mil
Mortgages (net value) $ 24.431 mil Bank Capital $ 5.472 mil
Total Assets $120.597mil Total Liabilities $120.597 mil

12. Determine the interest rate incomes and expenses for loans/deposits and the loan rates received by
banks. How are they recorded (debit/credit)?

i) Interest Income and Rates from Loans

Rate (Principal) for Commercial Loan: 25 mil./(2012) = 104,166
Balance of Commercial Loan = 25 mil – 0.104 mil. = 24,895,834
Interest Income for Commercial Loan: 24,895,834  9%  (1/12) = 186,719 mil.

Rate (Principal) for Mortgages: 25mil. / (3012) = 69,444 mil.

!!! Balance of Mortgages = 25 mil – 0.694 mil. = 24,930,556
Interest Income for Mortgages: 24.930,556  5.25%  (1/12) = 109,071 mil.

Debit Credit
Cash $469,400 Loans rates Commercial Loan $104,166
Interest Income Commercial Loan $186,719
Loans rates Mortgages $69,444
Interest Income Mortgages $109,071

ii) Interest Expense on Customer Deposits: 110 mil. 4%  (1/12) = 316,667

Debit Credit
Interest Expense $ 316,667 Cash $ 316,667

iii) Interest Expense on Deposits from other banks: 5 mil. 3.5%  (1/12) = 14,583.33

Debit Credit
Interest Expense $ 14,583 Cash $ 14,583
 13. Recalculate the 2nd month-end balance sheet for FB Bank.

Commercial Loan = 25 mil – 2 * 0.104 mil. = 24.792 mil.

Mortgages (gross value) = 25 mil – 2 * 0.069 mil. = 24.862 mil.

!!! In BS: Mortgages (net value) = 24.862 mil. – 0.499. mil. = 24.363 mil.

Cash = Cash into – Cash out = 62.470 mil. + 0.469 mil – 0.317 mil – 0.015 mil. = 62.607 mil.

Capital = Initial Capital + (Income – Expenses) = 5.472 mil. + 0.187 mil. + 0.109 mil. – 0.317 mil. – 0.015 mil.
= 5.436 mil.

Assets Liabilities
Required Reserves $8.8 million Checkable Deposits $ 110 million
Excess Reserves $62.607 million Deposits from other banks $ 5 million
Commercial Loan $ 24.792 million Reserve for credit risk $ 0.125 million
Mortgages (net value) $ 24.363 million Bank Capital $ 5.436 million
Total Assets $120.561 million Total Liabilities $120.561 million