2. (Credit Cycles) Consider a bank with the balance sheet given below.AssetsLiabilitiesReserves $10 millionSecurities $50 millionDepositsBank CapitalLoans$ 30 million$ 80 millionAnswer the following questions.(a) Compute the bank capital (the value of assets minus liabilities).(b) Assume that there was a default in mortgages loans by 10 million dollarsworth. Draw the resulting bank balance sheet.2(c) Because of the decreased bank capital, the bank has to sell their assets by10 million dollars. Suppose that it decides to sell securities. Since manyother banks are in the same situation and they sold securities, too. Becauseof the surge of supply, the price of the securities had dropped and it causedthe depreciation of bank's securities by 5 million dollars worth. Draw theresulting bank balance sheet.(d) Further Reading Similarly to this problem, an occurrence of asset deprecia-tion causes deterioration of bank balance sheet and that further causes con-traction in credits. In other words, the existence of credit amplifies the busi-ness cycle. This possibility is first analyzed by Kiyotaki and Moore (1997).Also see the survey by Mian and Sufi (2018)

Bank Statement - A bank statement is a formal description of all financial activities for each bank…

2. (Credit Cycles) Consider a bank with the balance sheet given below Assets Liabilities Reserves $10 million Deposits Bank Capital Securities $50 million Loans $ 30 million $80 million Answer the following questions. (a) Compute the bank capital (the value of assets minus liabilities (b) Assume that there was a default in mortgages loans by 10 m

2. (Credit Cycles) Consider a bank with the balance sheet given below Assets Liabilities Reserves $10 million Deposits Bank Capital Securities $50 million Loans $ 30 million $80 million Answer the following questions. (a) Compute the bank capital (the value of assets minus liabilities (b) Assume that there was a default in mortgages loans by 10 m

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Hi, below is an attached photo of the question. Please show explanation of calculations. Thankyou.
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