Question: 2. 1+1+1+1+1=5 points Consider a balance sheet for Bank ABC with$100,000 in deposits, $50,000 in mortgage loans, $30,000 in commercial loans, $20,000 in securities, $10,000

2. 1+1+1+1+1=5 points Consider a balance sheet for Bank ABC with$100,000

2. 1+1+1+1+1=5 points Consider a balance sheet for Bank ABC with$100,000 in deposits, $50,000 in mortgage loans, $30,000 in commercial loans, $20,000 in securities, $10,000 in reserves and bank capital of $10,000. Initially no mortgages are in default. a. Fill the balance sheet with the above given information, b. Calculate the risk weighted capital ratio. Is this bank fulfilling the Basel capital requirement. c. Suppose the $20,000 in mortgage loans default and the bank takes ownership of these houses. How is the balance sheet affected? Show the new balance sheet with housing as a new category. d. Using your answer to part c. assume next that housing prices fall by 50% as part of a general deflation. Show the effect of this change on a new balance sheet (Hint: what is effect on value of housing and capital) c. How does deflation threaten this bank? Based on this example explain the need for capital requirements

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