Question

1. Supppse Happy Bank starts with $25 billion in bank capital and currently has $50 billion in reserves (the required reserve and excess reserve) the resere requirement is 20 % and excess reserev amoutn to $5 billion.

a. What is happy bank's deposit and amount of loans given up? Please contrust basic balance sheet conssiting of deposit, capital, reserve, and loans for happy banks.

b. suppose that 8% of the borrows from Happy Bank default and these bank loans because 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?

Answer 1

a) Reserve requirement is 20% of deposits and excess reserve is $5 billion thus required reserve balance is $45 billion ($50 billion Reserve Balance - $5 billion excess reserve).

Required Reserve Balance = Deposits*20%

$45 billion = Deposits*20%

Deposits = $45 billion/20% = $225 billion

Loans given = Deposits+Bank Capital-Reserve

= $225 billion+$25 billion-$50 billion = $200 billion

  Balance Sheet of Happy Banks (Amounts in $ billion)

Assets	Amount	Liabilities	Amount
Reserves	50	Deposits	225
Loans	200	Bank Capital	25
	250		250

b) Loans become worthless = 8% of Loans

= $200 billion*8% = $16 billion

New Loans balance = $200 billion - $16 billion = $184 billion

Balance Sheet of Happy Banks (Amounts in $ billion)

Assets	Amount	Liabilities	Amount
Reserves	50	Deposits	225
Loans	184	Bank Capital (Bal. fig) (234-$225)	9
	234		234

c) Percentage decline in Bank total Assets = (New Assets - Old Assets)/Old Assets

= ($234 - $250)/$250 = -0.064 or -6.4%

Percentage decline in bank's capital = (New Bank's Capital - Old Bank's Capital)/Old Bank's Capital

= ($9 - $25)/$25 = -0.64 or -64%

Percentage decline in bank's total assets is 6.4% and percentage decline in bank's capital is 64%.