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4) Consider the balance sheets for two banks A and B: Bank A Bank B Assets Liabilities Reserves 20 Deposits 100 Assets Reserves 10
4) Consider the balance sheets for two banks A and B: Bank A Bank B Assets Liabilities Reserves 20 Deposits 100 Assets Reserves 10 Loans 220 Wholesale Funding Loans 230 Liabilities Deposits 100 Wholesale Funding (Repos) 200 (Repos) 170 Other Assets 80 Other Assets 80 Net worth (or "capital") Net worth (or 20 "capital") 50 a) What are the values of capital ratios for Bank A and Bank B? b) What are the values of leverage ratios for Bank A and Bank B? c) Which bank is more liquid? Explain why? In your answer explain what is meant by "liquidity" d) Suppose that the interest rate on reserves and deposits equals zero, ASSUMING NO DEFAULTS, the interest rate the banks earn on loans and other assets equals 6% and the interest rate bank pay on wholesale funding is 4%. Assuming no defaults, what is the return to capital (net worth) for Bank A and Bank B. Which bank is more profitable ASSUMING NO DEFAULTS?
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