Suppose that some of state banks securities were bonds


Suppose State Bank's initial balance sheet is as follows:

Assets                                       Liabilities and Owners' Equity

Reserves    $100                      Deposits                          $250

Loans          $400                     Debt                                 $450 

Securities   $300                     Capital(Owners'Equity)  $100

a. What is State Bank's leverage ratio?

b. Suppose that some of State Bank's securities were bonds whose value was linked to riskysubprime mortgages. When some homeowners could not pay their monthly mortgagepayments, the value of these bonds fell.  Suppose the value of State Bank's securities fell by$25.  What is the percentage reduction in the value of its securities? What is the percentage reduction in the value of its capital?

c. Now suppose that some of State Bank's car loans could not be repaid because the carowners lost their jobs during the recession. If the value of State Bank's loans also fell by$25, what is the value of State Bank's capital now?

d. In order to ensure that banks can pay their depositors, bank regulators require banks tomaintain a minimum ratio of bank capital to assets, called capital requirements. Suppose that State Bank's capital requirement was 8%. Did the bank meet this requirement in partc?  Show your calculation.

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Business Economics: Suppose that some of state banks securities were bonds
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