Consider the following balance sheet of a private bank. Assets Liabilities Reserves $200 Deposits $350 Loans $700 Debt $150 Securities $100 Capital $500

1. What is the leverage ratio of this bank? What is its capital ratio? What do these numbers mean?

2. Consider a $50 increase in the value of the securities held by this bank. (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank’s assets? (c) What is the percentage change in the value of the bank’s capital? (d) How are the previous numbers related to the initial leverage ratio?

3. Consider a $50 decrease in the value of the securities held by this bank relative to their initial value (i.e. ignore your answers to question 2). (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank’s assets? (c) What is the percentage change in the value of the bank’s capital? (d) How are the previous numbers related to the initial leverage ratio?

Answer rating: 100% (QA)

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