Balance Sheet, Net Worth, and Impact on Yes Bank

This article discusses the balance sheet of Yes Bank, its net worth, and the impact of giving loans. It also covers the concept of externalities and the Coase theorem. The article provides a timeline of cash flows and present values of Jennifer and Martin's income. It concludes with a discussion on monetary policy and interest rates.

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ECONOMICS

Answer – 1
2
(a) Yes Bank
Extract of Balance Sheet
Particulars
Amount (£
mn)
Assets
Loans
- To corporations
15
0
- To households 75 225
Investments
- YesBank's holdings of shares and bonds, etc
10
0
- Reserve deposits with Bank of England 25 125
Cash in vaults 25 25
Tangible assets and property 50 50
Total Assets 425
Liabilities
Deposits
- Retail current account deposits
25
0
- Commercial current account deposits
10
0 350
Borrowings
- Borrowing by YesBank in money market 45 45
Total Liabilities 395

b. Net worth of Yes bank is 30
It will be shown under the heading "Equity & Reserves" on the liabilities side, as the accounting
equation is Assets = Liabilities + Equity
c. The definition of bank money is money held by bank as a part of money supply. The following
balance sheet items would be covered under the standard definition of bank money.
(i) Retail current account deposits
(ii) Commercial current account deposits
d. Impact on Yes bank
Making a loan is the business of the Yes bank and it creates the asset for Yes bank
Money Supply
Giving out loan increases the money supply by £5000
Net worth
No impact on the date of loan given. After that every single day, net worth will keep on increasing
due to interest rate charged.
Impact on Mr. A's net worth
No impact on the date of loan taken. After that every single day, net worth will keep on reducing due
to interest rate charge. Further, spending the amount will further decrease the net worth.
e. Impact on Yes bank balance sheet
(i) Cash in vault (asset side) will be decreased.
(ii) Retail current account deposits (liabilities side) will be decreased
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Answer – 2
As per the financial media reports, the Yesbank is suffering high capital losses on its investments and
high default rates on its loans to households. The possible consequences of above may be:
(a) Giving loans to households without making proper investigation of their credit rating, in order to
increase its loan base.
(b) Further, in order to give more and more loans, the Yesbank might be used to redeem its
investment, suffering from pre payment penalties. As we can see from the balance sheet that the
investment amount is £ 125 mn only and the cash balance is £ 25 mn only. In case of sudden
requirement or withdrawal of cash by deposit holders, the Yesbank is obliged to honor their
requests resulting in capital losses.
(c) Poor recovery of bad debts and insufficient mortgage is also a reason of high default rates
amongst households (Grruber, 2016).
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Answer – 3
* It is assumed that all cash flows occur at
the end of the year.
a)
Present value of Jennifer's future income =
20000 / (1 +
50%)^2
= $8,889
b)
Present value of Martin's income =
20000 / (1 +
50%)^1
= $13,333
Jennifer Cash flow
0 $8,889
1 $13,333
2 $20,000
Martin Cash flow
0 $13,333
1 $20,000
2 $30,000
Jennifer's cash flow timeline
Year 0 Year 1 Year 2
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$8,889 $13,333
$20,00
0
Martin's cash flow timeline
Year 0 Year 1 Year 2
$13,333 $20,000
$30,00
0
c)
Present Value
Interest Rate Jennifer Martin
0% $20,000 $20,000
10% $16,529 $18,182
20% $13,889 $16,667
30% $11,834 $15,385
40% $10,204 $14,286
50% $8,889 $13,333
It is clear that even when interest rate is changed Martin will still get more than the Jennifer. Only at
interest rate 0% both will be earning the same amount. But impact of fall in interest rate is increase
in present value of cash flow for both (Adolf, 2013).
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0% 10% 20% 30% 40% 50% 60%
$0
$5,000
$10,000
$15,000
$20,000
$25,000
Present Value
Jennifer
Martin
Interest Rate
Present Value
d. Monetary policy includes change in interest rate to achieve certain goals by Central Bank. Change
of interest rate has bearing on the cash flow of individuals. In case of higher interest rate, value of
future cash flows will reduce. A lower interest rate implies higher cash flow (Braeutigam, 2010). So,
if the objective is to reduce money supply from the market, interest rate should be increased as it
will reduce to effective value of money. On the other hand, if the objective is to increase the money
supply, interest rate should be decreased.
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Answer – 4
Malthusian stagnation
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Answer – 3
Externalities happen when the action of one economic agent has a worst or better influence
on another economic agent. However, the first agent does not bear the cost nor have the
benefits of doing so. Externalities can be said to be a condition of a market failure. Negative
externality happens when the production of a firm lessens the well-being of others that are
not compensated by the firm (Mankiw & Taylor, 2011). As per the theorem of Coase, the
problem of externality can be solved with the help of negotiation. For example, the family of
Benson plant trees on their property that is near to the family of Waugh. The family of
Waugh gets an external advantage from the family mangoes trees of Benson as they pick all
the mangoes that fall on the property ground. This situation can be termed as an externality
and is negative in nature because the family of Waugh do not compensate the family of
Benson for the benefits received. In tune to this, the family of Benson can put a net that will
acts as a barrier to the mangoes from falling on the property line of Waugh if they want to
enjoy the mangoes from mangoes trees. On the other hand Benson has the right to impose a
cost on the family of Waugh if they wish to enjoy the mangoes (Robinn & Kristen, 2009).
However, the matter can be resolved in a better fashion if they wish to enjoy the mangoes
from the mangoes trees where the Waugh family enjoy mangoes and Benson family enhances
the mangoes production. Hence, negotiation is the best strategy that can reduce the impact of
negative externality.
(Robinn & Kristen, 2009)
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References
Adolf , W. (2013) Dynamic Circular Flow Models with Innovations. In The Two Sides of
Innovation. Springer International Publishing
Braeutigam, R. (2010) Microeconomics (4th ed.). Wiley.
Grruber, J. (2016) Public Finance and Public Policy. New York: Worth Publishers
Mankiw, N.G. and Taylor, M.P. (2011) Economics (2nd ed). Andover: Cengage Learning
Robin, H. and Kristen A.S. (2009). Misinterpreting the Coase Theorem. Journal of
Economic Issues [online]. 43 (1), pp. 215–238. Available from doi:10.2753/JEI0021-
3624430110 [5 April 2018]
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