Question

Consider the First National Bank with T-account as shown below. The First National Bank chose a 30% reserve ratio. First National Bank Assets Liabilities Reserves Deposits $100 Loans Capital (Owners' Equity) $10 Other Assets $10 (1) How much deposits did the First National Bank keep in reserves? (2) How much deposits did the First National Bank loan out? (3) What is the leverage ratio for the First National Bank? (4) If some of the consumers and businesses who borrowed from the First National Bank default on their loans, so that the First National Bank's manager is forced to conclude that $5 in loans will never be repaid, is the First National Bank illiquid, insolvent, or neither? Explain your answer briefly in one sentence or two).

Answer 1

According to HOMEWORKLIB POLICY, I would be answering the first four questions.

1. Reserve ratio to be maintained= 30%

Total assets=total liabilities= $110

Reserves to be maintained = 30% of $110 = .30*110= $33

2. Loans= total assets-reserves = 110-33= $77

3. Leverage ratio = total liabilities/owners' equity = 110/10 = 11

4. The bank will be insolvent as it won't be able to pay the deposit money put into the bank by the customers. The bank would fail to pay the debts owned.