Question

State Bank’s T-Account
Assets	Liabilities
Required Reserves                $9m	Checkable Deposits                    $90m
Loans                                  $90m	Borrowing from other banks       $9 m
Securities                           $10m	Bank Capital                                $10m

a. Identify the bank’s reserve requirement ratio.

b. Calculate State Bank’s leverage ratio.

c. Is the bank well capitalized? Explain your answer.

d. Suppose $5m of State Bank’s loans are worthless now. What happens to the bank’s balance sheet?

e. Does the bank become insolvent if $5 million of loans become worthless? Explain.

Answer 1

A). Bank reserve ratio is fraction of deposits that regulators required a bank to hold reserve and not loan out and this set by Fed, if required reserve ration is 1/10 then bank must hold $0.10 of each dollar it has in deposit in reserves, but can loan out $0.90 of each dollar

Reserve Ratio = Reserves/Depoists = $9m/$90m = 10%

OR

Reserve Ratio = Depoists *Reserve Requirement Ratio = $90m *10% = $9m

B) Core Capital Leverage = Bank Capital(Tier 1 capital) = $10m (taken from balance sheet)

Ratio (Bank Capital/Total Assest) ($10m/109m) = 9%

c) With current balance sheet the bank have a capital of 9.2% which is good, because reserve ratio should be 10% and bank have Capital closer to 9.2%.

D) if $5m loans become worthless then the balance sheet will go down to $109m and capital will shrink to only $5m which would reduce the capital from 9.2% to 4.8%, below is the balance sheet screen shot for reference after $5m loans getting worthless.

Assets	Amount	Liabilites	Amount
reserve	9000000	dep	90000000
loans	85000000	loans	9000000
sec	10000000	cap	5000000
Total	104000000	Total	104000000
Core Capital Leverage	5000000	4.8%