1. Assume the following balance sheet for a commercial bank: Assets Reserves Government Securities 100 Mortgages Loans The reserve requirement is 10% of demand deposits. Liabilities Demand Deposits Time Deposits Commercial Paper Capital 50 500 250 120 80 400 400 a. Suppose the bank is required to keep 10% of its risk-weighted assets in the form of capital. The risk weights are 0 for reserves and government securities, 50% for mortgages and 100% for loans. Does the bank have enough capital? b. Suppose the bank earns a 2% return on its holdings of government securities, a 4% return on its mortgages and a 5% return on its loans. What is the bank's return on equity? c. Suppose the bank wants to decrease the amount of its capital. Explain one way that it could do this. d. Suppose the value of the mortgages falls to 350 because some of the borrowers default on their payments. Show the effect that this will have on the balance sheet. 1. Assume the following balance sheet for a commercial bank: Assets Reserves Government Securities 100 Mortgages Loans The reserve requirement is 10% of demand deposits. Liabilities Demand Deposits Time Deposits Commercial Paper Capital 50 500 250 120 80 400 400 a. Suppose the bank is required to keep 10% of its risk-weighted assets in the form of capital. The risk weights are 0 for reserves and government securities, 50% for mortgages and 100% for loans. Does the bank have enough capital? b. Suppose the bank earns a 2% return on its holdings of government securities, a 4% return on its mortgages and a 5% return on its loans. What is the bank's return on equity? c. Suppose the bank wants to decrease the amount of its capital. Explain one way that it could do this. d. Suppose the value of the mortgages falls to 350 because some of the borrowers default on their payments. Show the effect that this will have on the balance sheet