ZeeK the Geek

This assignment will demonstrate the sensitivity of loans and deposits to changes in interest rates (price elasticity of demand) and its impact on discount window advances. Note that the basic bank in ProBanker has the following features.

a. Demand for loans will increase if interest rates are reduced (some customers will remain loyal but others will take the opportunity of the lower rates) .

b. Supply of deposits will increase if interest rates are reduced (some customers will remain loyal but others will take the opportunity of the higher rates)

c. If loan demand exceeds available funds (from deposits, CDs and equity), the program will force banks to borrow from the government through discount window advances.

d. Federal funds are short term loans between banks that can be used to cover shortfalls in funding and prevent going to the discount window.

Please note that in AutoBank you are playing solo against the computer. If you are in a competitive game, the results can be different because demand and supply are also affected by the decisions of your competitors.

Assignment 1:

1. Create a personal AutoBank.

a. Click on New Games.

b. Click on New AutoBank.

c. Select Large Bank Assignments template in using template.

d. Type your name for the new AutoBank in New game’s name.

Example “John Roger’s AutoBank.”

e. Click on Create Game.

You can create as many AutoBanks as you wish

2. Input decisions to your new AutoBank. There are four categories of decisions – ‘ Quantities to Choose, Rates to Choose, Advertising Decision and Other Miscellaneous Decisions.

Click on ProBanker icon on the top left to go to the home page.

a. Click on View Games.

b. Select your AutoBank.

c. Click on Play this bank.

Quantities to Choose – change the following

a. Initial Reserve Allocation = 200000

b. Federal Funds Purchased = 100000

c. 360 Days CDs to Issue = 100000

d. New Bonds to Purchase = 52500

e. The remaining boxes should all be zeroes.

3. Rates to Choose - Reduce loan rates by 0.3 percent and increase deposit rates by 1%

a. Reduce Corporate Fixed Rate = 9.00 percent

b. Reduce Corporate Floating Rate Spread = 3.70 percent

c. Reduce Installment Loan Rate =10.70 percent

d. Reduce Mortgage Loans Rate = 8.70 percent

e. Increase Retail CDs Rate = 7.00 percent

f. Increase Passbook Savings Rate = 6.00 percent

g. Increase IRAs (Long-Term Deposits) Rate = 8.50 percent

h. The remaining boxes should all be zeroes.

4. Advertising Expenses – Leave as is (430, 230,1300,1940,870,420, 210)

5. Other Miscellaneous decisions – Leave as is (0, 1, 0, 0, 100, 100)

6. Simulate next quarter (on left side of the screen). After a few seconds, you will notice a flicker and it should say just completed quarter 1. You are ready to review the results.

7. Record the results of quarter 1 in the shaded boxes of the Table below by clicking on Reports. Alternatively, you can copy and paste from the Excel file ‘Download Game Status in Excel Format’. Estimate the percent change from Q0 to Q1 in the shaded boxes and answer the questions below.

a. Were the reserve requirements of $200,000 sufficient? Explain the numbers "excess reserves" and "discount window advances."

b. Rates on Fixed, Floating, Installment and Mortgage loans were reduced by 0.3 percent (from 9.3% to 9.0% etc.). Which loans were impacted the most and which the least?

c. Rates on Retail CDs, Passbook Savings and LRAs were increased by 1%. Which deposits were impacted the most and which the least?

Assignment 1 continued

8. Input decisions for quarter 2 by reducing all loan rates further by 0.3 percent and increasing deposits rates by 1%.

a. Reduce Corporate Fixed Rate = 8.7%

b. Reduce Corporate Floating Rate Spread = 3.4%

c. Reduce Installment Loan Rate = 10.4%

d. Reduce Mortgage Loan Rate = 8.4%

e. Increase Retail CDs = 8.0%

f. Increase Passbook = 7.0%

g. Increase IRAs = 9.5%

h. Input Initial Reserve Allocation (200000), 360-day CDs (100000) and New Bonds to Purchase (52500) as before in Q1 BUT increase Federal Funds Purchased to $250,000.

9. Simulate next quarter and record the results of quarter 2 in the table and estimate the percent change from Q1 to Q2. Answer the same questions as 7a, 7b and 7c for changes from Q1 to Q2.

The above example provides an initial estimate of the elasticity of demand for loans and the elasticity of supply for deposits. As we progress further, we will examine additional factors that influence the volume loans and deposits and its impact on net income.