Jr. (JM.J) is a bank with $100,000 in deposits Part II. Answer the following que

Question

Jr. (JM.J) is a bank with $100,000 in deposits Part II. Answer the following question. James Madison $12,000 in savings 2,000 in savings accounts, $18,000 in long-term debt, and $5,000 in equity. They hold the minimu of U.S. Treasury securities (non-risky), and hold the remainder of the banks assets as risky loans. Assume that the banking regulator requres each bank to have 5% of risky assets held as capital, and reserves, $30,000 "10% of deposits held as reserves. 1. Show JMJs balance sheet 2. What is JMJs leverage ratio? Are they meeting their capital and reserve requirements? Calculate your answers and explain briefly 3. Suppose an economic downturn causes some borrowers to declare bankruptcy and default on their loans. This leads to a 1% decline in the value of their loans. Show JMJs new balance sheet. By what percentage does the value of JMJs assets fall? By what percentage does capital fall? Is JMJ now meeting it's capital and/or reserve requirements? Explain briefly 4. Returning to the balance sheet from 2, if the bank wanted to make a loan of $1,000 today, without selling any securities or loans, or borrowing money from another bank, how could they use sweeps to accomplish this transaction? Write out the new balance sheet after this transaction such that the bank exactly meets its reserve requirements today by "sweeping" their deposits into a savings account and makes a loan that is NOT redeposited at this bank, but spent and deposited elsewhere

Explanation / Answer

Summarise the given question JMJ is bank Deposits 100000 savings accounts 12000 Long term debt 18000 equity 5000 reserves as Tresaury securities 30000 Balance assests as risky assets each bank to have 5% risky assets as capital 10% of deposits as reserves LIABILITIES AMOUNT ASSETS AMOUNT Equity 5000 long term debt 18000 Deposits 100000 reserves as Tresaury securities 30000 savings accounts 12000 Risky assets 69000 117000 117000 10% of deposits = 100000*10% = 100000 There current reeserves is morethan 10000 5% risky assets = 69000*5% = 3450 equity capital is more than 3450 so no problem

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