The initial T-accounts of Bank A and Bank B are as follows:
Bank A |
|||
Assets |
Liabilities |
||
Reserves |
$55 mil |
Deposits |
$495 mil |
Loans |
$495 mil |
Bank |
$55 mil |
Bank B |
|||
Assets |
Liabilities |
||
Reserves |
$55 mil |
Deposits |
$528 mil |
Loans |
$495 mil |
Bank |
$22 mil |
a. Suppose each of both banks needs to write off bad loans of $27.5 million, prepare new T-accounts for both banks. What problem is Bank B facing?
b. Given the return on assets (y%), the higher the bank capital is, the higher will be the return on equity for the owners of the bank. Do you agree? Use the information from the initial T-accounts of Bank A and Bank B to support your answer.
c. What conclusion could you draw from (a) and (b)?
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