Question

Suppose that Bank One has deposits of $1200, bank capital of $80, reserves at $120 and loans at $1160. What is the maximum write down in the value of the bank's loans that will keep bank capital from falling below $35?

Group of answer choices

$34

$45

$55

$65

Answer 1

Answer: $45

Reserve ratio = 10%

If reserve ratio is 10%, the excess 90% of the deposits can be granted as loans.

Loans = $1200 x 90% = $1080

Loans given in excess = $1160 - $1080 = $80

To keep bank capital from falling below $35, it has to write down = $80 - $35 = $45