a. Explain the balance sheet (T-account) for AAB Bank. b. What is AAB Bank's leverage ratio? c. Suppose that 10 percent of the borrowers from AAB Bank default and these bank loans become worthless. How does the bank's new balance sheet look?

a. Explain the balance sheet (T-account) for AAB Bank. b. What is AAB Bank's leverage ratio? c. Suppose that 10 percent of the borrowers from AAB Bank default and these bank loans become worthless. How does the bank's new balance sheet look?

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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Question

AAB Bank holds $100 in bank capital and
$100 in securities, and then takes in $600 in
deposits. It keeps 10 percent of deposits in
reserve. It uses the rest of its reserves to make
bank loans.
a. Explain the balance sheet (T-account) for
AAB Bank.
b. What is AAB Bank's leverage ratio?
c. Suppose that 10 percent of the borrowers
from AAB Bank default and these bank loans
become worthless. How does the bank's new
balance sheet look?
d. By what percentage do the bank's total
assets decline? By what percentage does the
bank's total capital decline? Which change is
larger? Why? Is the bank still solvent and
why?

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