Barney Stinson starts his own bank called Goliath National Bank (GNB). As the ow

Question

Barney Stinson starts his own bank called Goliath National Bank (GNB). As the owner, Barney puts in 2000 of his own money. GNB then borrows 4000 in a long term loan from Barney’s friend, accepts 14,000 in demand deposits from the city, buys 7000 of U.S Treasury bonds, lends 10,000 to local businesses to finance new investments, and keeps the remainder of the bank’s assets as reserves

a. Show GNB’s balance sheet. What is GNB’s leverage ratio?

b. An Economic downturn causes 5 percent of the local business to declare bankruptcy and default on their loans. Show GNB’s new balance sheet. By what percentage does the value of GNB’s assets fall? By what percentage does GNB’s capital fall

Explanation / Answer

Leverage ratio = Own funds / Borrowed funds = 2000 / 4000 = 0.5

The assets have fallen by $500. % fall = 500 / 20000 = 2.5%

The capital has not fallen because the capital only reduces when it is repaid.

Liabilities Amount Assets Amount Own funds 2000 Treasury bonds 7000 Long term loan 4000 Loans 10000 Deposits 14000 Cash 3000 Total 20000 Total 20000 Liabilities Amount Assets Amount Own funds 2000 Treasury bonds 7000 Long term loan 4000 Loans 9500 Deposits 14000 Cash 3000 Loss due to downturn 500 Total 20000 Total 20000

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