Question

In: Economics

(a) Imperial Bank has deposits of $150 million and securities of $110m; the bank also makes...

(a) Imperial Bank has deposits of $150 million and securities of $110m; the bank also makes loans to its customers. Construct the balance sheet of the bank if the bank is regulated and required to retain 10% of its deposits as reserves

(b) What is the numerical value of the bank capital of Imperial Bank?

(c) Suppose the bank makes bad loans to the tune of $5m, show and explain how the balance sheet will be altered.

Expert Solution

(a) Balance Sheet of Bank

It list the assets and Liabilities of a bank. Assets are the one which bank owns such as loans, securities etc. and Liability are item owed by bank to someone else like the deposits.

With the given data Balance Sheet of Imperial Bank is shown below

Assets

Liability

Loans

Securities $110 million

Reserves $15million

Deposits $150 million

Total asset $125million

Total Liability $ 150 million

( b) Bank capital is = Total assets - Total Liability

Here it is: numerical value of the bank capital of Imperial Bank =$125 million - $150 million = -$25 million

Negative value indicate that short term debt exceeds short term assets.

(c) Bad loans are a Liability, and it can only add to the Liability

Corresponding Balance Sheet of Bank

Assets

Liability

Loans

Securities $110 million

Reserves $15million

Deposits $150 million

Bad loan $5 million

Total asset $125million

Total Liability $155 million

numerical value of the bank capital of Imperial Bank =$125 million - $155 million = -$30 million

Rahul Sunny answered 1 year ago

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