Question

An FI has the following Balance Sheet (in millions of dollars): Assets : Cash $80 Deposits...

An FI has the following Balance Sheet (in millions of dollars):

Assets : Cash $80 Deposits $270 Loans $200 Securities $20

Liabilities and Equity : Deposits $270 Equity $30

The bank is expecting a $100 million net deposit drain. Show the FI's new balance sheet if the bank uses Stored Liquidity method is used to meet the liquidity shortfall.

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Answer:

The Stored Liquidity method is used to meet the liquidity shortfall.

The $ 100 million drain reflects on the deposits and cash and securities are used to meet this. (Cash $ 80 mln and securities $ 20 mln)

FI's new balance sheet:

Assets                                   Liabilities and Equity   

Loans   $200   Equity $30

Deposits          $ 170

Total Assets $200 Total liabilities and equity $ 200

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