Question

1. Consider a bank with $550 in checkable deposits, corporate securities currently valued at$175, $116 in reserves, $240 in real-estate loans, and facing an 8% required reserve ratio. (50 points)

1. (a) What does the balance sheet for this bank look like? (20 of 50 points)

2. (b) Suppose that due to the pandemic, a number of the coporations for which this bank holds debt go out of business and are unable to repay. As a result, the value of the corporate securities held by the bank falls by 18%. The bank is considering borrowing from the Fed to help them out of insolvency. Could this work? Explain your reasoning. As part of your explanation, you must show how this option would affect both the balance sheet of the bank and the balance sheet of the Fed.

Answer 1

Ans a. Putting the items in balance sheet, assets are short by 19 which can assumed to be undisbursed funds available with bank.

Liabilities	Amt	Assets	Amt
Checkable deposits	550	Corporate Securities	175
		Reserves	116
		Real estate loans	240
		Undisbursed Funds (b/f)	19
Total Liabilities	550	Total Assets	550

Ans b. 18% fall down in corporate securities mean writing down 31.50 off the balance sheet. This will lead to balance sheet given below:

Liabilities	Amt	Assets	Amt
Checkable deposits	550	Corporate Securities	143.50
Loss	-31.5	Reserves	116
		Real estate loans	240
		Undisbursed Funds (b/f)	19
Total Liabilities	518.5	Total Assets	518.5

Taking help from Fed could work and save the bank from insolvency. This liquidity will ensure sustaining operations and servicing the checkable deposits at time of demand by customers. The balance sheet needs to remain healthy to avoid panic among customers. Post pandemic profits can be used to pay back the loan from fed.

Ans C. Loan from fed will increase the liability and assets for bank. And for fed, the transaction will be added and subtracted from different lines of assets.

Bank:

Liabilities	Amt	Assets	Amt
Checkable deposits	550	Corporate Securities	143.50
Loss	-31.5	Reserves	116
Loan from Fed	50	Real estate loans	240
		Undisbursed Funds (b/f)	69
Total Liabilities	568.5	Total Assets	568.5

Fed:

Liabilities	Amt	Assets	Amt
		Cash	-50
		Loan to Bank	50
Total Liabilities	0	Total Assets	0