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ASSETS                                         &nb

ASSETS                                                  LIABILTIES

CASH        20                                         DEPOSITS         60

LOANS     80                                         DEBT                 20

                                                               EQUITY             20

A bank is projecting a decline in deposits of $10 over the course of the next six months.

Currently they pay 4% on deposits, earn 7% on loans. The cost of new debt is 7.5%.

What is the bank’s financing gap?

What is the cost of addressing this decline of deposits using stored liquidity?  

Purchased liquidity?  

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Homework Answers

Answer #1

Bank's financing gap = Interest earned on loans - Interest given on deposits = 7% - 4% = 3%

The gap is also called "spread" and constitutes as income for the bank. This shows income earned excluding operating expenses (service charge of deposits only).

Cost of addressing using stored liability = Spread forgone due to lesser funds available "internally" for loans to potential customers = 3% of the short funds (7% - 4%)

Cost of addressing using purchased liability = Spread forgone due to lesser funds available "externally" for loans to potential customers = 0.5 % of funds borrowed from outside = ( 7.5% - 7%)

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