Reference no: EM131426954
Suppose State Bank's initial balance sheet is as follows:
Assets Liabilities and Owners' Equity
Reserves $100 Deposits $250
Loans $400 Debt $450
Securities $300 Capital(Owners'Equity) $100
a. What is State Bank's leverage ratio?
b. Suppose that some of State Bank's securities were bonds whose value was linked to riskysubprime mortgages. When some homeowners could not pay their monthly mortgagepayments, the value of these bonds fell. Suppose the value of State Bank's securities fell by$25. What is the percentage reduction in the value of its securities? What is the percentagereduction in the value of its capital?
c. Now suppose that some of State Bank's car loans could not be repaid because the carowners lost their jobs during the recession. If the value of State Bank's loans also fell by$25, what is the value of State Bank's capital now?
d. In order to ensure that banks can pay their depositors, bank regulators require banks tomaintain a minimum ratio of bank capital to assets, called capital requirements. Supposethat State Bank's capital requirement was 8%. Did the bank meet this requirement in partc? Show your calculation.
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