Q. Happy Bank initiates with $200 in bank capital. After that it takes in $800 in deposits. It keeps 12.5 percent of (1/8th) of the deposit in reserve. It uses the rest of the assets to make bank loans.
a) Show the balance sheet of happy bank
b) what is happy bank leverage ratio?
c) Suppose 10% of the borrowers from happy bank default and these bank loans become worthless. Illustrate the new balance sheet of bank.
d) By what percentage do the total assets decline by bank? By what percentage does the bank's capital decline? Illustrate which change is larger? Why?