CHAPTER 11

Week 7 Class Exercises

1. Ocean View State Bank estimates that over the next 24 hours the following cash inflows
and outflows will occur (all figures in millions of dollars):

Deposit withdrawals $100 Sales of bank assets $ 40

Deposit inflows 95 Stockholder dividend payments 150
Revenues from sale of non-deposit
Scheduled loan repayments 90 services 95
Acceptable loan requests 60 Repayments of bank borrowings 60
Borrowings from the money
market 80 Operating expenses 50

What is this bank’s projected net liquidity position in the next 24 hours? From what sources can
the bank cover its liquidity needs?

2. Mountain Top Savings is projecting a net liquidity deficit of $10 million next week partially as
a result of expected quality loan demand of $32 million, necessary repayments of previous
borrowings of $15 million, planned stockholder dividend payments of $10 million, expected
deposit inflows of $26 million, revenues from nondeposit service sales of $18 million, scheduled
repayments of previously made customer loans of $23 million, asset sales of $10 million, other
operating expenses of $15 million, and money market borrowings of $15 million. How much
must Mountain Top’s expected deposit withdrawals be for the coming week?

3. Suppose Abigail Savings Bank's liquidity manager estimates that the bank will
experience a $375 million liquidity deficit next month with a probability of 15 percent, a $200
million liquidity deficit with a probability of 35 percent, a $100 million liquidity surplus with a
probability of 35 percent, and a $250 million liquidity surplus bearing a probability of 15
percent. What is this savings bank’s expected liquidity requirement? What should management
do?

Liquidity Deficits or Associated

Surpluses Probabilities
-$375 million 15 percent
-$200 million 35 percent
+$100 million 35 percent
+$250 million 15 percent
100 percent

The bank's expected liquidity requirement is:

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4. First Savings of Rainbow, Iowa, reported transaction deposits of $75 million (the daily
average for the latest two-week reserve computation period). Its nonpersonal time deposits over
the most recent reserve computation period averaged $37 million daily, while vault cash
averaged $5 million. Assuming that reserve requirements on transaction deposits are 3 percent
for deposits over $10.7 million and up to $58.8 million and 10 percent for all transaction deposits
over $58.8 million while time deposits carry a 3 percent required reserve, calculate this savings
institution’s required daily average reserve balance.

5. Parvis Bank and Trust Co. has calculated its daily average deposits and vault cash
holdings for the most recent two-week computation period as follows:

Net transaction deposits = $ 90,000,000

Non-personal time deposits under
18 months to maturity = $169,000,000
Eurocurrency liabilities = $ 7,000,000
Daily average balance in vault cash = $ 2,000,000.

Suppose the reserve requirements posted by the Board of Governors of the Federal Reserve
System are as follows:
Net transaction accounts:
$10.7 to $58.8 million 3%
More than $58.8 million 10%
Nonpersonal time deposits:
Less than 18 months 3%
18 months or more 0%
Eurocurrency liabilities—all types 3%

What is this bank's daily average required level of legal reserves? How much must the bank hold
on a daily average basis with the Federal Reserve bank in its district?

6. Why do financial firms face significant liquidity management problems?

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