1) Create an example of a bank balance sheet where the bank has a leverage ratio of 15:1, assuming deposits of $2000 and reserves of $500, debt of $800 and loans of $1600. You need to identify the levels of capital and security holdings in the bank to achieve this leverage ratio.
a) Compute happens to the value of the owner’s equity if the value of the bank’s total assets drops by 2% (assume total assets drops by this much through a fall in security and loan values).
b) Compute happens to the value of the owner’s equity if the value of the bank’s total assets drops by 5%.
c) Compute happens to the value of the owner’s equity if the value of the bank’s total assets drops by 10%.
d) How much of a decline could the bank withstand in its assets before it was insolvent? Explain.