Suppose you are the CFO of a bank with the following Balance Sheet and that the...

 

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Suppose you are the CFO of a bank with the following Balance Sheet and that the required reserve ratio is 10%: Assets Liabilities + Capital Reserves $10 Deposits Securities $50 Borrowings and bonds $110 Bank capital Loans $110 $ 50 $ 10 Notice that the bank issues bonds. Recall that bonds are debt instruments. An internal report produced by one of you analysts forecasts that the bank will face a deposit outflow of $20 and losses of $20 ($5 coming from securities and $15 from loans). 1. Should the bank increase its capital? Why? (5%) 2. Suppose the bank issues a 10-yr bond (this is a liability) which is sold for $20. Assume the revenues of this sale are credited into the bank's reserves. Show this change using a T-account. (5%) 3. Do these new funds solve the potential solvency issue? Why? (5%) 4. Suppose the bank cannot issue equity at the moment. If the expected net earnings of the period are $25, what is the least amount of earnings that the bank should retain to strengthen its capital position? (5%) Suppose you are the CFO of a bank with the following Balance Sheet and that the required reserve ratio is 10%: Assets Liabilities + Capital Reserves $10 Deposits Securities $50 Borrowings and bonds $110 Bank capital Loans $110 $ 50 $ 10 Notice that the bank issues bonds. Recall that bonds are debt instruments. An internal report produced by one of you analysts forecasts that the bank will face a deposit outflow of $20 and losses of $20 ($5 coming from securities and $15 from loans). 1. Should the bank increase its capital? Why? (5%) 2. Suppose the bank issues a 10-yr bond (this is a liability) which is sold for $20. Assume the revenues of this sale are credited into the bank's reserves. Show this change using a T-account. (5%) 3. Do these new funds solve the potential solvency issue? Why? (5%) 4. Suppose the bank cannot issue equity at the moment. If the expected net earnings of the period are $25, what is the least amount of earnings that the bank should retain to strengthen its capital position? (5%)

Answer rating: 100% (QA)

1 Yes the bank should increase its capital The outflow of deposits and losses of 20 wil... View the full answer