Jimmy Paul Miller starts his own bank, called JPM. As owner, Jimmy puts in $2,000 of his own money. JPM then borrows $4,000 in a long-term loan from Jimmy’s uncle, accepts $14,000 in demand deposits from his neighbors, buys $7,000 of U.S. Treasury bonds, lends $10,000 to local businesses to finance new investments, and keeps the remainder of the bank’s assets as reserves at the Fed.

a. Show JPM’s balance sheet. What is JPM’s leverage ratio?

b. An economic downturn causes 5 percent of the local businesses to declare bankruptcy and default on their loans. Show JPM’s new balance sheet. By what percentage does the value of JPM’s assets fall? By what percentage does JPM’s capital fall?