Read the Planet Money article "Ask a Banker: Capital, Capital!" by Matt Levine and answer the following questions.
https://www.npr.org/sections/money/2013/05/20/185511800/ask-a-banker-capital-capital
1. List all the things that a bank can do to change the amount of shareholder capital on its balance sheet.
2. Explain the "psychologico-regulatory" advantage of capital compared to debt, in terms of freaking out.
Consider the statement "more capital makes banks safer."
3. Why does the author say that the statement is somewhat "nonsensical?"
4. Why does the author say that he is "lying" when he says that the statement is "nonsensical?"
The previously proposed Brown-Vitter bill attempted to solve the Too-Big-To-Fail problem with a much lower leverage limit. How does this affect banks?
Assume banks must maintain at least 10% of total assets in shareholder capital. A bank with $100 million in total assets has just enough shareholder capital to meet the 10% requirement and then the bank has a loss of $5 million.
5. What is the amount of shareholder capital after the loss? Hint: Think of the balance sheet before the loss and then determine what changes when the loss occurs, remembering that the left side must equal the right side.
6. What is the amount of total assets after the loss? Hint: Think of the balance sheet before the loss and then determine what changes when the loss occurs, remembering that the left side must equal the right side.
7. After the loss, if the bank chose meet the 10% capital requirement by increasing shareholder capital through selling additional shares, what dollar amount would it have to sell to get back to the 10% of total assets in shareholder capital? Hint: Consider the amounts of assets and shareholder capital remaining on the balance sheet after the loss, then determine how much shareholder capital must be raised.
8. If the bank chose meet the 10% capital requirement by selling assets, what dollar amount would it have to sell to get back to the 10% of total assets in shareholder capital?
Consider the statement "more capital makes risks clearer."
9. Explain the advantage of clearer risks.
10. Explain the disadvantage of clearer risks.