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1. Consider the following balance sheet for a hypothetical nancial institution, BankA and Bank B Bank A's Balance Sheet Liabilities 80 Bank A's Balance Sheet Capital 10 (1) Calculate the leverage ratio of Bank A and B, respectively (2) Suppose the value of assets may drop by 2.96 with a probability of 10%. (otherwise, stay the same, i.e., it is the only risk). Calculate the probability of being in insolvency [or each bank. (3) For simplicity, suppose banks can also issue bonds. Calculate the risk premiums for the bonds issued by each bank that give the same expected rate of return as the risk-tree bond whose interest rate is 4%. (Further assume that 1. if a bank becomes insolvent, the bond holders will get nothing, 2. issuing new bonds won't affect the probability of being in insolvency calculated from (2)) 2. Following the nancial crisis, regulatory capital requirements for the banking system increased in the new Basel Accords. Based on the discussion from Question 1, what would be the effect on the nancial market. 3. What would be the effect of the new Basel Accords on the IS-LM model, it we assume that the central bank's target interest rate remains the same? And how it would Elect the equilibrium from the [S-LM model? 4. Suppose now people in the economy believe that ination in nut year will increase, as the economy will be fully reopened in the following year. What's the eect on real interest rate and output