Quizzol

QUESTION:

Use the information given in Great Lakes National Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets		Liabilities and Owners' Equity
Reserves	$150	Deposits	$1,200
Loans	$600	Debt	$200
Securities	$750	Capital (owners' equity)	$100

Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and the account.

This would also bring the leverage ratio from its initial value of to a new value of .

Which of the following statements regarding the capital requirement is true? Check all that apply.

Its intended goal is to protect the interests of those who hold equity in the bank.

It specifies a minimum leverage ratio for all banks.

Its intended goal is to protect the interests of the depositors.

ANSWER:

Use the information given in Great Lakes National Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets		Liabilities and Owners' Equity
Reserves	$150	Deposits	$1,200
Loans	$600	Debt	$200
Securities	$750	Capital (owners' equity)	$100

Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account andincrease Correct

thedebt

account.

Points:

1 / 1

Within any balance sheet, the total value of all accounts on the left-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 borrow $100 to supplement their existing reserves, both reserves (an asset) and debt (liability) increase by $100.

This would also bring the leverage ratio from its initial value of15.00 Correct

to a new value of16.00 Correct

Points:

1 / 1

The original leverage ratio equals the sum of the original assets divided by the original amount of capital:

$Leverage Ratio$	$=$	$\frac{Reserves + Loans + Securities}{Capital}$
	$=$	$\frac{$150 + $600 + $750}{$100}$
	$=$	$\frac{$1,500}{$100}$
	$=$	$15.00$

After the transactions, the new leverage ratio must take into account the $100 increase in reserves:

$New Leverage Ratio$	$=$	$\frac{$250 + $600 + $750}{$100}$
	$=$	$\frac{$1,600}{$100}$
	$=$	$16.00$

Which of the following statements regarding the capital requirement is true? Check all that apply.

Its intended goal is to protect the interests of those who hold equity in the bank.

It specifies a minimum leverage ratio for all banks.

Its intended goal is to protect the interests of the depositors.

Points:

0.67 / 1

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.

Posted by Cleveland on September 9, 2024