Question

a di has assets of $10 million consisting of $1 million in cash and $9 million in loans. the di has core deposits of $6 million, subordinated debt of $2 million, and equity of $2 million. increases in interest rates are expected to cause a net drain of $2 million in core deposits over the year?

Answer 1

The question involves analyzing the impact of a $9 million loan made by Singleton Bank to Hank's Auto Supply on the bank's balance sheet and the potential effects of rising interest rates on the bank’s core deposits.

Step-by-step explanation:

The question relates to the changes in Singleton Bank's balance sheet due to a shift in its business plan. Singleton Bank records a $9 million loan as an asset when it lends to Hank's Auto Supply. This transaction increases the bank's assets, maintained as reserves, as they have issued a cashier's check which is deposited at First National, increasing that bank's deposits and reserves by the same amount. Moreover, First National can loan out the remaining amount after keeping the required reserves.

The scenario also mentions potential changes in Singleton Bank’s liabilities due to an expected net drain of $2 million in core deposits over the year if interest rates rise. This could affect the bank’s stability and liquidity. In the broader economic context, such lending activities by banks can expand the M1 money supply, highlighting the crucial role that bank lending plays in the economy’s liquidity.