Question
4 Consider a commercial bank with the following balance sheet: Cash $7m Deposits $74m Gross Loans 73m Equity 6m Suppose the managers of the bank
4
Consider a commercial bank with the following balance sheet:
Cash $7m Deposits $74m
Gross Loans 73m Equity 6m
Suppose the managers of the bank believe that $4 million of its loan portfolio is likely to be unpaid based on macroeconomic conditions. Which of the following is most accurate concerning how the financial institutions balance sheet will change?
Select one:
a. The loan losses will be added to loans in the amount of $4 million
b. Equity drops to $2 million, causing potential equity capitalization issues
c. The loan losses are paid out of cash and there is no change to bank equity
d. The loan losses will be added to loans in the amount of $4 million & Equity drops to $2 million, causing potential equity capitalization issues
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started