Question 9 Chapter 16 Banking requirements
Explanation: Close Explanation
Within any balance sheet, the total value of all accounts on the left-hand
... [Show More] side (the assets) must equal
the total value of all accounts on the right-hand side (the liabilities). An increase in an account on one
side must, therefore, lead to a corresponding increase on the opposite side or a decrease in another
account on the same side. Thus, when a new customer adds $100 to his account at Southwestern
Mutual Bank, which the owners of the bank then use to make $100 worth of new loans, both loans
(an asset) and deposits (liability) increase by $100.
9. Banking requirements
Use the information presented in Southwestern Mutual Bank's balance sheet to answer the following
questions.
Bank’s Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $200 Deposits $675
Loans $800 Debt $250
Securities $1,000 CapitaI (owners' equity) $1,075
Suppose a new customer adds $100 to his account at Southwestern Mutual Bank, which the owners of the
bank then use to make $100 worth of new loans. This would increase the loans account and
the account.
Points: 1 / 1
This would also bring the leverage ratio from its initial value of to a new value of .
Points: 0 / 1
Explanation: Close Explanation
The original leverage ratio equals the sum of the original assets divided by the original amount of
capital:
increase
Explanation: Close Explanation
Capital requirements are designed to ensure that banks will have sufficient capital to repay the
depositors and debtors. A bank's "capital" is the difference between the total value of the bank's assets
and its total deposits plus debt. That is, the bank's capital is the money that would be left over if the
bank were able to liquidate all of its assets to pay off all of its depositors and debtors. If a bank holds a
high percentage of "risky" assets (such as loans that could be defaulted on), capital requirements are
higher to ensure that the bank will remain solvent—even if some of its loans are not repaid.
Thus the capital requirement does not specify any set requirement for all banks but rather determines
the amount of capital that is appropriate to balance the amount of risk a bank carries with its asset
allocation.
Which of the following is true of the capital requirement? Check all that apply.
It specifies a minimum leverage ratio for all banks.
Its intended goal is to protect the interests of thedepositors.
Its intended goal is to protect the interests of those who hold equity in the bank.
Points: 0 / 1
After the transactions, the new leverage ratio must take into account the $100 increase in loans: [Show Less]