Question

9. Bank leverage

Use the information presented in Northeastern Mutual Bank's balance sheet to answer the following questions.

                                                 Bank's Balance Sheet

                         Assets                                          Liabilities and Owners' Equity

Reserves                  $200    Deposits    $1,600

Loans                       $800 Debt                         $250

Securities              $1,000 Capital (owners' equity) $150

Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and ( increase, decrease) the (capital, debt, deposits, loans, reserves) account.

This would also bring the leverage ratio from its initial value of (13.33, 14.00, 15.43, 17.40) to a new value of (13.33, 14.00, 15.43, 17.40).

Which of the following is true of the capital requirement? Check all that apply.

       ( ) Its intended goal is to protect the interests of those who hold equity in the bank.

   ( ) It specifies a minimum leverage ratio for all banks.

       ( ) The higher the percentage of assets a bank holds as loans, the higher the capital requirement.

Answer 1