Question

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The financial crisis compelled banks to reduce their leverage sharply. Consider the following two views of the balance sheet of a bank before and after the financial crisis. Bank Balance Sheet: View 2 (in millions) Bank Balance Sheet: View 1 (in millions) Liabilities Liabilities Assets Assets Deposits $28e Other borrowed funds $6ee Deposits $8ee Reserves $30 Reserves $30 Loans $820 Other borrowed funds $90 Loans $820 Bank capital $98 Securities $150 Securities $150 Bank capital $110 Calculate the leverage ratios for each view. Instructions: Enter your responses rounded to two decimal places. View 1: Leverage ratio View 2: Leverage ratio Which balance sheet view is more likely to be that of the bank after the financial crisis? View 2 View 1

Answer 1

Part 1

Leverage ratio = total assets / bank capital

View 1: leverage ratio = (30+820+150)/110 = 9.09

View 2: leverage ratio = (30+820+150)/90 = 11.11

Part 2

Correct answers with check mark

• long terms for the Executive Board unchecked
• irreversible policy decisions checked
• treaty modification for ECB structure change checked

incorrect answers with empty box

• reappointment of members of the Executive Board checked
• treaty modification for change from economic growth mandate unchecked

Part 3

Correct answers with check mark

• explanatory statements following meetings
• release of target interest rate
• regular reports to European Parliament

incorrect answers with empty box

• publication of target unemployment rate

Part 4

Correct answers with check mark

• The presence of national bias may make agreement among members of the governing council of the ECB more difficult.
• Fewer members are likely to have an easier time coming to a decision than a large group.
• The FMOC has very little regional bias

incorrect answers with empty box

• The governing council of the ECB has very little regional bias
• The presence of national biases may make agreement among members of the FMOC more difficult.

Part 5

Correct answers with check mark

• Give public speeches
• Publish transcripts of its meetings
• Hold periodic press conferences
• Release an account of their policy meetings after a short period
• Immediately release the target interest rate following policy meetings

incorrect answers with empty box

• Disseminate data and research
• Report periodically to a democratically elected body
• Make public the votes in individual votes of the members of the policy-making committee