The following is a balance sheet of a commercial bank (in millions of dollars). The bank experiences
Question:
The bank experiences a run on its deposits after it declares it will write off $10 million of its loans as a result of nonpayment. The bank has the option of meeting the withdrawals by first drawing down its cash and then by selling off its loans. A fire sale of the remaining loans in one day can be accomplished at a 10 percent discount. They can be sold at a 5 percent discount if sold in two days. The full market value will be obtained if they are sold after two days.
a. What is the amount of loss to the insured depositors if a run on the bank occurs on the first day? On the second day?
b. What amount do the uninsured depositors lose if the FDIC uses the insured depositor transfer method to close the bank immediately? The assets will be sold in two days.
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Step by Step Answer:
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders