Trout Lake Financial has $20 million in capital and $200 million in deposits. Th

Question

Trout Lake Financial has $20 million in capital and $200 million in deposits. The bank makes a $50 million commercial loan and lends another $100 million in mortgages, with the following terms: 400 standard 30- year, fixed- rate mortgages with a nominal annual rate of 4% each for $250,000. Assume that desired reserves are 8%.

a) Construct a balance sheet for this bank (ignore any loan loss reserves). Assets Liabilities Desired Reserves Deposits Excess Reserves Bank Capital Loans

b) How well capitalized is the bank?

c)Calculate the risk-weighted assets and risk-weighted capital ratio for Trout Lake Financial.

d) The next day the bank invests another $50 million in commercial loans. However, later that day, a major housing market shock forces mortgage rates up to 7.33%, which implies that the present value of Trout Lake’s mortgage holdings is now only $ 150,000 per mortgage. Bank regulators force Trout Lake to sell its mortgages to recognize the fair market value. Reconstruct Trout Lake’s balance sheet to account for this new information. How do these events affect its capital position? e) In order to avoid a bank failure, banking regulators decide to give Trout Lake a $30 million capital injection. However, once Trout Lake’s financial situation becomes known, a bank run results and $50 million in deposits is withdrawn. Reconstruct Trout Lake’s balance sheet to account for this new information. If the regulators decide that Trout Lake needs a capital ratio of 10% to prevent further bank runs , how much of an additional capital injection would be required to reach a 10% capital ratio?

Explanation / Answer

Substitute 4,002 lb for , and for in Equation (1).

Hence, the shear stress acting on pin B is .

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