You have the following information on the Bank of Morrisland as of 05/12/2020: it currently holds a total of $350 million in checking account deposits (Currently, the bank is not holding any other type of deposits). It has borrowed $120 million from the Federal Reserve as discount loans. It has raised another $80 million by borrowing through the REPO funding. It has also borrowed 100 million dollars through the overnights (Federal funds) market. The bank currently holds $25 million in excess reserves. The bank currently holds $120 million in treasury securities and another $120 million in municipal bonds. The bank has made $105 million loans to consumers and $175 million loans to corporations. The bank has made another $120 million loans in residential mortgages. Assume that the required reserve ratio is 10%.

a. (6 pts.) What does the bank’s balance sheet look like?

b. (5 pts.) Following a trouble in the mortgage market, the bank found that the present value of residential mortgages has declined to 70 million dollars. As a result, regulators forced the bank to sell these mortgages to recognize the fair market value. In the meantime, hearing the news depositors pull out 50 million dollars from the bank. What does the bank’s balance sheet look like? How do these events affect its capital position?

c. (4 pts.) Find out how much capital injection is required in this scenario so that the bank can reach a 5% capital ratio.

Answer rating: 100% (QA)

Part a Liabilities Amount Assets Amount Reserves 25 treasury securities 120 federal fund market 100 ... View the full answer