1. In what sense were the S&Ls uniquely vulnerable to an increase in inflation?

2. Briefly describe why it is important to impose capital requirements to commercial banks.

3. Briefly describe what self-fulfilling expectation is.

4. The following entries (in millions of dollars) are from the balance sheet of Revendell National Bank (RNB):

U.S. Treasury bills Demand deposits Mortgage-backed securities Loans from other banks C&I loans Discount loans NOW accounts Savings accounts Reserve deposits with Federal Reserve Cash items in the process of collection Municipal bonds Bank building

$35 65 30 8 67 5 42 10 8 10 5 4

a. What is RNBs capital/asset ratio? Assuming the capital requirement is 10%, does the bank meet the requirement? Show your work.

b. What is RNBs capital/risk-adjusted asset ratio given the risk factors below? Assuming the capital requirement of this ratio is 25%, does the bank meet this requirement? Show your work.

Reserves: 0

Securities (Mortgage-backed): 0.5

Securities (Municipal bonds and Treasury bills): 0.1

C&I loans: 0.8