1. Do a google search on Quantitative Easing (QE) and Open Market Operations (OMO) (in your response, provide the reference for your source(s)).
a. Explain how each of these Federal Reserve tools work.
b. Under what circumstances does the Fed use OMO?
c. When and why has the Fed used QE? Are there concerns related to it?
2. Do a google search on the Fed’s Balance Sheet (indicate your reference source). Identify the primary assets and liabilities on the Fed’s current balance sheet and their significance for financial analysts.
3. Identify and briefly explain the important characteristics and features of:
a. commercial bank trust departments
b. investment banks
4. See if you can determine the amount of Bluebird State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank.
(Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income in an Excel Spreadsheet.)
Effective tax rate 28%
Interest on loans $90
Employee wages, salaries, and benefits 13
Interest earned on government bonds and notes 9
Provision for loan losses 5
Overhead expenses 3
Service charges paid by depositors 3
Security gains/losses –7
Interest paid on federal funds purchased 5
Payment of dividends of $4 per share on 1 million outstanding shares to be made to common stockholders
Interest paid to customers holding time and savings deposits 40
Trust department fees 3
5. Comparing balance sheet characteristics of small versus the largest banks. Go to www.fdic.gov select “Researchers & Analysts,” click “Statistics on Depositary Institutions (SDI),” and view “Comparison Reports.
” Set up two columns for the period ended 09/30/2020 then click “Standard Peer Group” and select: Commercial Banks with Assets of $100M to $1B and Assets more than $250B.
Click “Next.” Then select “Assets & Liabilities” as percent of total assets (click “Next”) and find and record each of the following percentages for each group in a table:
• Number of institutions (row 1)
• Cash and due from depository institutions (row 4)
• Securities (row 6)
• Federal funds sold & reverse repurchase agreements (row 7)
• Net loans & leases (row 8)
• Trading account assets (row 10)
• Total deposits (row 17)
• Federal funds purchased & repurchase agreements (row 21)
• Volatile liabilities (row 46)
• Total equity capital (row 26)
Discuss the differences in percentages between small and large banks.
6. Define and distinguish between the terms Allowance for Loan & Leases (ALL) and Provision for Loan & Lease Losses (PLL). Illustrate the relationship between ALL and PLL using a simple equation.
