As a consultant, you have been asked to assess a bank’s sources and uses of funds and to offer recommendations on how it can restructure its sources and uses of funds to improve its performance. This bank has traditionally focused on attracting funds by offering certificates of deposit. It offers checking accounts and money market deposit accounts, but it has not advertised these accounts because it has obtained an adequate amount of funds from the CDs. It pays about 3 percentage points more on its CDs than on its MMDAs, but the bank prefers to know the precise length of time it can use the deposited funds. (The CDs have a specified maturity whereas the MMDAs do not.) Its cost of funds has historically been higher than that of most banks, but it has not been concerned because its earnings have been relatively high. The bank’s use of funds has historically focused on local real estate loans to build shopping malls and apartment complexes. The real estate loans have provided a very high return over the last several years. However, the demand for real estate in the local area has slowed.
a. Should the bank continue to focus on attracting funds by offering CDs, or should it push its other types of deposits?
b. Should the bank continue to focus on real estate loans? If the bank reduces its real estate loans, where should the funds be allocated?
c. How will the potential return on the bank’s uses offunds be affected by your restructuring of the asset portfolio? How will the cost of funds be affected by your restructuring of the bank’s liabilities?
