Question 9 Chapter 16 Banking requirements version 3
Use the information presented in Northeastern Mutual Bank's balance sheet to answer the
... [Show More] following
questions.
Bank’s Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $175 Deposits $650
Loans $700 Debt $225
Securities $875 CapitaI (owners' equity) $875
Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the
reserves 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: 1 / 1
Explanation: Close Explanation
The original leverage ratio equals the sum of the original assets divided by the original amount of
capital:
increase debt
Which of the following is true of the capital requirement? Check all that apply.
The higher the percentage of assets a bank holds as loans, the higher thecapital requirement.
It specifies a minimum leverage ratio for all banks.
Its intended goal is to protect the interests of those who hold equity in the bank.
Points: 1 / 1
After the transactions, the new leverage ratio must take into account the $100 increase in reserves:
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. [Show Less]