The initial T-accounts of Bank A and Bank B are as follows: Bank A Assets Liabilities Reserves
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Question:
The initial T-accounts of Bank A and Bank B are as follows:
Bank A | |||
Assets | Liabilities | ||
Reserves | $55 mil | Deposits | $495 mil |
Loans | $495 mil | Bank | $55 mil |
Bank B | |||
Assets | Liabilities | ||
Reserves | $55 mil | Deposits | $528 mil |
Loans | $495 mil | Bank | $22 mil |
a. Suppose each of both banks needs to write off bad loans of $27.5 million, prepare new T-accounts for both banks. What problem is Bank B facing?
b. Given the return on assets (y%), the higher the bank capital is, the higher will be the return on equity for the owners of the bank. Do you agree? Use the information from the initial T-accounts of Bank A and Bank B to support your answer.
c. What conclusion could you draw from (a) and (b)?
Related Book For
Money Banking and Financial Markets
ISBN: 978-0078021749
4th edition
Authors: Stephen Cecchetti, Kermit Schoenholtz
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