5. Provided the following balance sheet, answer the questions below: Assets Liab

Question

5. Provided the following balance sheet, answer the questions below:

Assets                             Liabilities

Required reserves $8 M             Checkable deposits $100M

Excess reserves $3 M               Bank capital $6 M

T-bills $45 M

Commercial loans $50 M

a. What is the required reserve ratio?

b. What are the total reserves this bank holds?

c. What are the bank’s risk weighted assets?

d. If the bank commits to another $15 Million in its commercial loans, how has the capital ratio changed?

Explanation / Answer

(a) Required reserve ratio = Required reserves / Checkable deposits = $8M / $100M = 0.08 = 8%

(b) Total reserves = Excess reserves + Required reserves = $(3 + 8)M = $11M

(c) Risk-weighted Assets = Commercial Loans = $50M

(Since loans carry the risk of default, only they are risk-weighted).

(d) Capital ratio = Bank capital / Commercial loans

Original capital ratio = $6M / $50M = 0.12 = 12%

Revised capital ratio = $6M / $(50 + 15)M = $5M / $65M = 0.0769 = 7.69%

So, capital ratio has decreased.

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