Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio...

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Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio of 10. Explain the meaning of these ratios and what would happen to each of these banks if the value of their assets fell by 6 percent. a) What is the difference between systematic and idiosyncratic risk? b) Which type of risk can be almost eliminated through diversification? 2. a) What is the difference between an illiquid bank and an insolvent bank? b) Would the Federal Reserve's lender of last resort function be the most appropriate remedy for an illiquid or an insolvent bank? Explain. c) Would the FDIC's resolution authority be the most appropriate remedy for an illiquid or an insolvent bank? Explain. Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio of 10. Explain the meaning of these ratios and what would happen to each of these banks if the value of their assets fell by 6 percent. a) What is the difference between systematic and idiosyncratic risk? b) Which type of risk can be almost eliminated through diversification? 2. a) What is the difference between an illiquid bank and an insolvent bank? b) Would the Federal Reserve's lender of last resort function be the most appropriate remedy for an illiquid or an insolvent bank? Explain. c) Would the FDIC's resolution authority be the most appropriate remedy for an illiquid or an insolvent bank? Explain.

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a The leverage ratio of a bank measures the banks capital to its total ... View the full answer