Suppose the bank has a portfolio of risky assets (loans) that cost 100 at t=0. The...
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Suppose the bank has a portfolio of risky assets (loans) that cost 100 at t=0. The bank finances the portfolio with debt (d) and equity (e), where d + e = 100. Suppose the return R from the risky portfolio has a uniform distribution between [80,180]. a) Assume the value of bank debt outstanding is 90. What is the probability the bank will default? b) Assume the value of bank debt outstanding is 90. When the bank fails, the deposit insurance fund (FDIC in the US, TMSF in Türkiye) receives the assets of the bank and pays the depositors the outstanding debt. What would be the expected cost to the deposit insurance fund. How does the cost change with the outstanding debt of the bank? Find the exact relation. c) The bank wants to keep the probability of failure at 5%. Calculate economic capital. c) The regulator wants to keep the probability of default at 2%. Calculate regulatory capital. Suppose the bank has a portfolio of risky assets (loans) that cost 100 at t=0. The bank finances the portfolio with debt (d) and equity (e), where d + e = 100. Suppose the return R from the risky portfolio has a uniform distribution between [80,180]. a) Assume the value of bank debt outstanding is 90. What is the probability the bank will default? b) Assume the value of bank debt outstanding is 90. When the bank fails, the deposit insurance fund (FDIC in the US, TMSF in Türkiye) receives the assets of the bank and pays the depositors the outstanding debt. What would be the expected cost to the deposit insurance fund. How does the cost change with the outstanding debt of the bank? Find the exact relation. c) The bank wants to keep the probability of failure at 5%. Calculate economic capital. c) The regulator wants to keep the probability of default at 2%. Calculate regulatory capital.
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Answer rating: 100% (QA)
a To calculate the probability of default we need to determine the portion of the return distribution that falls below the value of bank debt outstand... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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