Assignment 2: Part 3 of 3 - Chapter 10 Questions X Consider the following balance sheets of two banks. These two banks have equal amounts of assets but are leveraged differently. Assume that there is no regulatory capital requirement. A-Z Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $300,000 Deposits (Liabilities): Capital (Net worth): Total: $300,000 Total: $270,000 $30,000 $300,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $300,000 Deposits (Liabilities): Capital (Net worth): Total: $300,000 Total: $285,000 $15,000 At S300,000 Which bank has a higher leverage ratio? Assignment 2: Part 3 of 3 - Chapter 10 Questions Which bank has a higher leverage ratio? O Medes Bank O Arch Bank Suppose both banks' assets increase by 25% to $375,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $285,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by 50%, and Medes Bank's capital decreases by 100%. Therefore, if the value of assets is falling, a higher leverage ratio means a smaller percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? O Medes Bank O Arch Bank