Bank Profits: Mbank has deposit liabilities of $50 million. It only keeps the minimum cash reserves required by law of 15%. Its annual costs (wages, rent, utilities, etc.) are $1.5 million. What is Mbank’s profit under the following circumstances?
a. It charges 5 percent annual interest on its loans, and pays 1 percent annual interest on its deposits.
b. It charges 5 percent annual interest on its loans, but in order to meet the market competition it raises its interest rate on deposits to 3 percent.
c. Strong loan demand permits it to change 8 percent interest on all of its loans outstanding, and it reverts to paying 1 percent annual interest on its deposits.
d. The interest rates are as in part (a) above, but due to uncertain economic conditions; Mbank decides to hold $5 million in excess reserves.