ECN 4410 MONEY, FINANCIAL INSTITUTIONS
AND BANKING
CHAPTER 9 : COMMERCIAL BANK
1. List three sources of and three uses for commercial bank funds?
Main sources of funds come from the customer deposits, borrowing from non-
deposit sources, the share capital contributed by the bank’s shareholders and
the reserves from the retained profits. The main uses of funds are for lending
loans to customers, purchase securities and cash asset (reserve).
2. What is meant by a bank’s capital accounts? Suppose Hometown Bank has
total assets of $800 million and capital accounts of $35 million. Suppose the
regulatory authorities tell the Bank it must increase its capital/total assets ratio
to 5 percent. Explain the options open to Hometown Bank?
Bank’s capital account is the owner’s equity stake in the bank and can be
determined from the difference between total asset and total liabilities. The
bank could seek to reduce the share of its profit it pays out in dividends by
increasing the spread between the interest rates it charges for loans, a
second option is to issue new equity, such as through a rights issue to
existing shareholders, an equity offering on the open market or placing a bloc
of shares with an outside investor, third option is the bank can run down its
loan portfolio, or sell assets outright, and use the proceeds of loan
repayments or asset sales to pay down debt. Less drastically, it can slow
down lending growth. Finally, it can seek to reduce its risk weighted assets
by replacing riskier (higher weighted) loans with safer ones, or with
government securities.
3. Your bank has total assets of $220 million and a capital-to-total assets ratio of 7
percent. You learn that your bank’s entire $20 million loan package to Central
American nations will be written off as bad loans. Will your bank survive this crisis?
Explain?
Total assets : $ 220 million
Capital : 7 % x $ 220 million
: $ 15.4 million
A debt that has been written-off as bad loans which worth for $20 million will
reduce the assets by $20 million. The bank’s capital that also worth for $15.4
million will reduce until it become negative which is -$4.6million. The bank can
, survive if the bank can find new sources of funding before the actual of debt
writen-off
4 Community Bank has total assets of $600 million, total liabilities of $564 million,
and
earned profits this year of $6 million. Calculate Community Bank’s:
a. Rate of return on total assets
b. Equity multiplier
c. Rate of return on capital
a. Rate of return on total assets
Earnings
Rate of return on totalassets :
Total assets
$ 6 million
:
$ 600 million
:0.01∨1 %
AND BANKING
CHAPTER 9 : COMMERCIAL BANK
1. List three sources of and three uses for commercial bank funds?
Main sources of funds come from the customer deposits, borrowing from non-
deposit sources, the share capital contributed by the bank’s shareholders and
the reserves from the retained profits. The main uses of funds are for lending
loans to customers, purchase securities and cash asset (reserve).
2. What is meant by a bank’s capital accounts? Suppose Hometown Bank has
total assets of $800 million and capital accounts of $35 million. Suppose the
regulatory authorities tell the Bank it must increase its capital/total assets ratio
to 5 percent. Explain the options open to Hometown Bank?
Bank’s capital account is the owner’s equity stake in the bank and can be
determined from the difference between total asset and total liabilities. The
bank could seek to reduce the share of its profit it pays out in dividends by
increasing the spread between the interest rates it charges for loans, a
second option is to issue new equity, such as through a rights issue to
existing shareholders, an equity offering on the open market or placing a bloc
of shares with an outside investor, third option is the bank can run down its
loan portfolio, or sell assets outright, and use the proceeds of loan
repayments or asset sales to pay down debt. Less drastically, it can slow
down lending growth. Finally, it can seek to reduce its risk weighted assets
by replacing riskier (higher weighted) loans with safer ones, or with
government securities.
3. Your bank has total assets of $220 million and a capital-to-total assets ratio of 7
percent. You learn that your bank’s entire $20 million loan package to Central
American nations will be written off as bad loans. Will your bank survive this crisis?
Explain?
Total assets : $ 220 million
Capital : 7 % x $ 220 million
: $ 15.4 million
A debt that has been written-off as bad loans which worth for $20 million will
reduce the assets by $20 million. The bank’s capital that also worth for $15.4
million will reduce until it become negative which is -$4.6million. The bank can
, survive if the bank can find new sources of funding before the actual of debt
writen-off
4 Community Bank has total assets of $600 million, total liabilities of $564 million,
and
earned profits this year of $6 million. Calculate Community Bank’s:
a. Rate of return on total assets
b. Equity multiplier
c. Rate of return on capital
a. Rate of return on total assets
Earnings
Rate of return on totalassets :
Total assets
$ 6 million
:
$ 600 million
:0.01∨1 %
