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MGT411 Money & Banking GDB Solution Spring 2013

Case:

A & D is a private commercial bank working since 2002. It employs over 3500 employees at 36 branches all across the country. Its balance sheet depicted total assets worth Rs 35.5 billion ranking it one among the top 15 commercial banks at December 30, 2006. With the advent of global recession in the banking industry, the change in the interest rate resulted in decreased value of its assets ultimately increasing the liabilities, back in 2009. Gradually it succumbed to the prevailing crisis and left with the only option to approach the central bank to lend it a helping hand.

The central bank upon the receipt of the request, constituted a committee of five members for this purpose. At the end of a thorough analysis, it delivered a decision to provide “short term loan” to the crisis stricken bank so that it may deal with the issue of liquidity.

Requirement:

  1. The decision of central bank to provide loan to commercial bank was correct or not?  (5 marks)
Solution: In my opinion the decision of the board of central bank is correct. As we know that central banks are also called lender of last resort and more over it is also the part of their function that whenever some financial problem then they would provide load to them the get them out of that situation. 
  1. Either yes or no support your answer with logical reasons. (20 marks)
Solution: Decision of giving short term loans was right because as we know its part of function of central bank to provide loans to commercial bank, and it is also source of revenue for central bank


(Note: if no, you are required to identify the mistake with logical reasoning.)

  1. What will be the result of the action/ decision taken by central bank? (5 marks)

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