Consider the assets (in millions) of two banks, A and B. Both banks are funded by $120 million
in deposits and $20 million in equity.
Bank A Assets Bank B Assets
Cash $10 Cash $20
Treasury securities 40 Consumer loans 30
Commercial loans 90 Commercial loans 90
Total assets $140 Total assets $140
a. Which bank has a stronger liquidity position? (1 mark)
b. Which bank probably has a higher profit? (1 mark)
c. What is the return-risk trade-off for liquidity assets? (2 marks)