Corporate Fin Mgt NDLM.PDF

(Nora) #1

Transaction No. 2. The German Central Bank transfers its deposits to a German
commercial bank. (Sometimes this is done as part of domestic monetary policy in which
case the Central Bank exchanges dollar deposits for deutsche marks with the commercial
banks. The objective is to reduce credit in the domestic market and give incentives for
capital outflows.)


Transaction No. 3. A French importer asks for a Euro-loan from the German
Commercial bank. Assuming that the commercial bank keeps a precautionary reserve of
10%, it can make a loan in the amount of $90.


Transaction No. 4. The French importer uses the Euro-loan to pay a debt owned to a
German exporter.


Transaction No. 5. The German Exporter deposits its dollar balances with the German
commercial bank.


Transaction No. 6. Citibank wishes to borrow Euro-dollars from the German commercial
bank to take care of anticipated loan demand.


Transaction No. 7. Citibank wishes to make a loan. In order to convert the deposit at
Chase into lendable funds it asks Chase to provide cash or deposits with the Federal
Reserve Bank. Since Chase was fully loaned-up, it has to sell some loans in order to
collect the required amount of cash.


Show these transactions in T-accounts of the banks involved in the transactions.


Ans:


The transactions described below are represented by “T accounts” at end.


Transaction No. 1.


Chase: There is only a change in deposit ownership from Mr. Smith to the German
central bank.


German Central Bank: There is an exchange of assets from securities to deposits.


Money supply in U.S. and Germany remains constant.


Balance of payments of each country has offsetting entries.


Transaction No. 2.


Chase: There is only a change in deposit ownership from German central bank to the
German commercial bank.


German Central Bank: An exchange of assets from claims on Chase to claims on the
German commercial banks.

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