Nathan starts his own bank, called Nathan Rocks (NR). As owner, Nathan puts in $2,000 of his own money. NR then borrows $4,000 in a long-term loan from Nathan’s friend, Amy. He further accepts $14,000 in demand deposits from his neighbors, buys $7,000 of U.S. treasury bonds, lends $10,000 to local pizza businesses to finance new investment, and keeps the remainder of the bank’s assets as reserves at the Fed.
(1) Show NR’s balance sheet. What is NR’ leverage ratio.
(2) An economic downturn causes 5% of the local businesses to declare bankruptcy and default on their loans. Show NR’s new balance sheet. By what percentage does the value of NR’s assets fall? By what percentage does NR’s capital fall?
(3) Economic situation further become dismal and NR lost 20% of pizza business loan from his initial loan. What can you infer about the demand deposit and long-term debt on the liabilities. Bank run is possible? Why? Under this situation, what can you propose to president as an economist?