Suppose Melvin’s Bank starts with the balance sheet in Table 9.4A and the income statement in Table 9.2. Show how the balance sheet and income statement change in each of the following scenarios. Also calculate the new ROA, ROE, and rate sensitivity gap.
a. The bank issues $20 of new stock and uses the proceeds to make loans.
b. Britt moves $25 from his savings account to his checking account.
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c. The bank is hired to manage the assets of a wealthy person, for which it is paid $10 a year.
d. The bank lends $5 of reserves to another bank in the federal funds market. (Assume the federal-funds rate is the same as the Treasury-bill rate.)
e. The bank replaces $10 of its loans with floating-rate loans, which pay the Treasury-bill rate plus 2 percent.
For the year ended December 31, 2021
Interest Income Securities 4% ($30) $1.20
Loans 8% ($80) $6.40
Noninterest Income $5.00 (letters of credit)
TOTAL INCOME $12.60
Interest Expense 4% ($50) $2.00 (savings accounts)
Noninterest Expense $6.00 (salaries, etc.)
TOTAL EXPENSE $8.00
PROFITS (Income – Expense) $4.60 ROA = profits assets = $4.60 $120 = 3.8% ROE = profits capital = $4.60 $20 = 23%
MELVIN’S BANK BALANCE SHEET
December 31, 2020
Liabilities and Net Worth
Checking Deposits 50
Nontransaction Deposits 50
Net Worth 20