Illiquid assets of the bank can only be liquidated

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Reference no: EM131952839

A bank has the following assets in its portfolio: $10,000 cash and $40,000 illiquid assets. The liability consists of deposits of $4,000 each in 10 demand deposit accounts. There is a rumour about the solvency of the bank caused all 10 depositors to line up outside the bank to demand withdrawals. Assume that the illiquid assets of the bank can only be liquidated at a 75% discount (i.e. at 25% of the current value) and there is no deposit insurance and minimum reserve requirement. Further assume that borrowing is impossible for the bank. Which of the following statement(s) about what will happen is (are) correct?

a. The first 5 depositors in the line will each get $4,000 back and the last 5 depositors will get nothing back.

b. The 10 depositors will each get $2,000 back.

c. The equity holders in the bank will get their $10,000 capital back.

d. The first 2 depositors will each get $4,000 back, the third one gets $2,000 back and the rest of the depositors get $0 back.

e. None of the 10 depositors will get the deposit back.

Reference no: EM131952839

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