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Consider a balance sheet for Bank ABC $50,000 in mortgage loans, $30,000 in commercial loans, $10,000 in securities, $10,000 in reserves, with$90,000 in deposits, and bank capital of $10,000. The desired reserve ratio is 10%. Fill the balance sheet with the above given information. a. Calculate the traditional leverage ratio. Is the bank well capitalized? b. Calculate the risk weighted capital ratio, Is this bank fulfilling the Basel

Consider a balance sheet for Bank ABC $50,000 in mortgage loans, $30,000 in commercial loans, $10,000 in securities, $10,000 in reserves, with$90,000 in deposits, and bank capital of $10,000. The desired reserve ratio is 10%. Fill the balance sheet with the above given information. a. Calculate the traditional leverage ratio. Is the bank well capitalized? b. Calculate the risk weighted capital ratio, Is this bank fulfilling the Basel

Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
7th Edition
ISBN:9781285165912
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Monetary System
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Consider a balance sheet for Bank ABC $50,000 in mortgage loans, $30,000 in commercial loans, $10,000 in securities, $10,000 in reserves, with$90,000 in deposits, and bank capital of $10,000. The desired reserve ratio is 10%. Fill the balance sheet with the above given information. a. Calculate the traditional leverage ratio. Is the bank well capitalized? b. Calculate the risk weighted capital ratio. Is this bank fulfilling the Basel capital requirement? c. Suppose there is a bank run and Bank ABC sees 50% of its deposits withdrawn. Show the effect of this bank run on the balance sheet of the bank. [Hint: In order to meet the withdrawal requests bank will initially let go of reserves, then liquidate its securities and lastly if need be will sell its loans]. d. Based on this example explain the use of "government safety nets" to avoid bank panics and bank runs.
Transcribed Image Text:Consider a balance sheet for Bank ABC $50,000 in mortgage loans, $30,000 in commercial loans, $10,000 in securities, $10,000 in reserves, with$90,000 in deposits, and bank capital of $10,000. The desired reserve ratio is 10%. Fill the balance sheet with the above given information. a. Calculate the traditional leverage ratio. Is the bank well capitalized? b. Calculate the risk weighted capital ratio. Is this bank fulfilling the Basel capital requirement? c. Suppose there is a bank run and Bank ABC sees 50% of its deposits withdrawn. Show the effect of this bank run on the balance sheet of the bank. [Hint: In order to meet the withdrawal requests bank will initially let go of reserves, then liquidate its securities and lastly if need be will sell its loans]. d. Based on this example explain the use of "government safety nets" to avoid bank panics and bank runs.
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