Uses the rest of its assets to make bank loans

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Morgan Bank starts with $ 200 in bank capital. It then takes in $ 800 in deposits. It keeps 12.5 percent (1/ 8th) of deposits in reserve. It uses the rest of its assets to make bank loans.

a. Show the balance sheet of Morgan Bank.

b. Suppose that 10 percent of the borrowers from Morgan Bank default and these bank loans become worthless. Show the bank’s new balance sheet.

c. By what percentage do the bank’s total assets decline? By what percentage does the bank’s capital decline? Which change is larger? Why?

Reference no: EM13771743

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