Question 9 Chapter 16 Banking requirements version 2
Explanation: Close Explanation
Within any balance sheet, the total value of all accounts on the left
... [Show More] -hand 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 the owners of the bank contribute an additional $175 from
their own funds and use it to buy securities in the name of the bank, both securities (an asset) and
capital (owners' equity) increase by $175.
9. Banking requirements
Use the information presented in Midwestern Mutual Bank's balance sheet to answer the following questions.
Bank’s Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $150 Deposits $850
Loans $750 Debt $100
Securities $600 CapitaI (owners' equity) $550
Suppose the owners of the bank contribute an additional $175 from their own funds and use it to buy
securities in the name of the bank. This would increase the securities account and
account.
the
Points: 1 / 1
This would also bring the leverage ratio from its initial value of to a new value of .
Points: 1 / 1
Explanation: Close Explanation
The original leverage ratio equals the sum of the original assets divided by the original amount of
capital:
increase
Which of the following do bankers take into account when determining how to allocate their assets? Check all
that apply.
The size of the monetary base
The return on each asset
The total value of liabilities
Points: 0 / 1
Explanation: Close Explanation
When determining how to allocate their assets among reserves, loans, and financial securities, banks
must first make sure that their reserves are sufficient to meet the reserve requirement set by their
regulators. Bankers can then choose how to allocate the remainder of their assets between holding
additional reserves, making loans, and investing in securities. Each one of these asset types comes
with a different level of risk and rate of return. Riskier assets tend to yield a higher rate of return;
thus, individual banks choose the asset allocation that provides the correct balance of risk and profit.
The total size of the monetary base and the total value of liabilities both affect the total value of a
bank's assets, but they do not directly influence the manner in which a bank chooses to allocate those
assets.
After the transactions, the new leverage ratio must take into account both the $175 increase in
securities and the $175 increase in capital: [Show Less]