Questions

Homework:Chapter 10 Homework

Multiple fill-in-the-blank

Part 1Consider a bank with the following balance sheet:[table] Assets | Liabilities Required reserves | $1010 | million | Checkable deposits | $120120 | million Excess reserves | $2222 | million | Bank capital | negative $ 18−$18 | million Loans | $7070 | million | | | [/table]Assume that required reserves are 88%. In order to avoid insolvency, regulators decide to provide the bank with $2727 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, $3030 million in deposits is withdrawn.Show the effects of the capital injection and bank run on the balance sheet. (Round your responses to the nearest whole number.)[table] Assets | Liabilities Required reserves | $enter your response here | million | Checkable deposits | $enter your response here | million Excess reserves | $enter your response here | million | Bank capital | $enter your response here | million Loans | $enter your response here | million | | | [/table]

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Step-by-Step Analysis

We begin by restating what the problem is asking and identifying all the pieces that must be filled in on the balance sheet after two events: a capital injection by regulators and a bank run. First, outline the events and their monetary effects: - Capital injection: Regulators inject capital into the bank to avoid insolvency. This increases the bank’s bank capital (equity) and, depending on the mechanism, may also influence assets if new funds are used to support reserves or loans. - Bank run (withdrawals): A newspaper report spooks depositors and leads to withdrawals equal to 30 million. This reduces checkable deposits (the liability) and typically reduces reserves proportionally (since reserves are a fraction of deposits). If reserves are illiquid or if lenders try to meet withdrawals from excess reserves, those need to be used before drawing on capital. Key relationships to use when filling the balance sheet: - Required reserves = reserve ratio × checkable deposits. With a required-reserve ratio of 88%, the required reserves depend on the level of checkable deposits after the events. - Excess reserves = total reserves – required reserves. Total reserves equals required reserves plus any excess reserves (and any change due to the events). - Bank capital (equity) changes due to the capit......Login to view full explanation

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