Question #$6$: Capital Adequacy Management $[12$ Points$]$ The balance sheets for two financial institutions: Lancaster Bank and Sierra Savings and Loan are provided below. Balance Sheet: Lancaster Bank Balance Sheet: Sierra Savings and Loan

$($a$)$ Suppose that both banks had $$17$ million worth of residential loans that defaulted, and the banks are now forced to write off the loans $($these loans are no longer considered assets$).$ Illustrate the new balance sheets after the residential loans are written off for both Lancaster Bank and Sierra Savings and Loan. $[4$ Points$]$

b$)$ Sierra Savings and Loans had more bank capital than Lancaster Bank. What is the upside for Sierra Savings and Loan in having more bank capital? $[2$ Points$]$

$($c$)$ Calculate the equity multiplier $($EM$)$ for both Lancaster Bank and Sierra Savings and Loan. Use the initial total assets for both banks in your calculations. $[2$ Points$]$

$($d$)$ What does return on equity $($ROE$)$ measure? Calculate the ROE for both Lancaster Bank and Sierra Savings and Loan if the return on assets $($ROA$)$ is equal to $0\mathrm{.}4\%$ for both banks. What is the downside for Sierra Savings and Loan in having more bank capital? $[4$ Points$]$