Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps

Question:

Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans.
a. Show the of Happy Bank.
b. What is Happy Bank’s leverage ratio?
c. Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans become worthless. Show the bank’s new By what percentage do the bank’s total assets decline? By what percentage does the bank’s capital decline? Which change is larger Why?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...