Question

9. Bank leverage Use the information presented in Southwestern Mutual Bank's balance sheet to answer the following questions. Bank's Balance Sheet Liabilities and Owners' Equity Assets Reserves $150 Deposits $1,200 Loans $600 Debt $200 Securities $750 Capital (owners' equity) $100 Suppose a new customer adds $100 to his account at Southwestern Mutual Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans 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. The reserve requirement The size of the monetary base The total value of liabilities

Answer 1

Suppose a new customer adds $100 to his account at Southwestern-Mutual Bank, which the owners of the bank then use to make $100 of new loans. This would increase the loans account and increase the deposits account.

This would also bring the leverage ratio from its initial value of 15 to a new value of 16

Leverage ratio = Total asset/Original capital

OLD,

(150+600+750)/100 = 1500/100 = 15

NEW,

(150+600+750+100)/75= 1600/100 = 16

While determining how to allocate the banks assets bankers considers the reserve ratio as it helps in determining the amounts going to loans and to reserves.

The reserve requirement.