# Understanding Bank Balance Sheets: An Example from Midwestern Mutual Bank### Bank's Balance Sheet#### Assets- **Reserves**: $150- **Loans**: $600- **Securities**: $750#### Liabilities and Owners' Equity- **Deposits**: $1,200- **Debt**: $200- **Capital (owners' equity)**: $100---### Scenario AnalysisSuppose the owners of the bank borrow $100 to supplement their existing reserves. This action will increase the reserves account and affect the _________ account.Further, this change will alter the leverage ratio from its initial value of _____ to a new value of _______.### Considerations for Asset AllocationWhen determining how to allocate their assets, bankers consider the following factors. Check all that apply:- [ ] The size of the monetary base- [ ] The total value of liabilities- [ ] The return on each assetThis example helps to illustrate the impact of borrowing on a bank's balance sheet and the important considerations in asset allocation.

Suppose the owner of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and increase the debt account. The leverage ratio is calculated as follows. Leverage ratio=Total assetEquity=1,500100=150The new leverage ratio after the owner borrows $100 is calculated as calculated as follows. Leverage ratio=Total assetEquity=1,500+100100=1600100=160 The new leverage ratio is 160. This would also bring the leverage ratio from its initial value of 150 to anew value of 160. Bankers allocate their asset based on return on each each asset, thus, third option is the correct answer.

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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 $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 do bankers take into account when determining how to allocate their assets? Check all that apply. O The size of the monetary base O The total value of liabilities The return on each asset

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 $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 do bankers take into account when determining how to allocate their assets? Check all that apply. O The size of the monetary base O The total value of liabilities The return on each asset

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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9. Bank leverage 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 $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 is true of the capital requirement? Check all that apply. Its intended goal is to protect the interests of the depositors. 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.
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