4. Consider the following balance sheets for two hypothetical financial institutions, bank B and bank C: A
Question:
4. Consider the following balance sheets for two hypothetical financial institutions, bank B and bank C: A A Bank B L cash 1,000 Deposits 400 loans to bank C 5.0 capital loo 100 Total assets 1,500 total liabilities + capital = 1,500 Bank C Mortgage-backed- Securities 800 Deposits 200 loans from L bank B 500 capital 100 total assets = 800 total liabilities + capital 800 3 (a) What is the leverage ratio in each bank? (b) Suppose housing prices fall sharply and the mortgage-backed securities held by bank C fall in value to only $500. The shortfall in bank C's equity means that it cannot repay the loan it received from bank B. Assume bank C pays back as much as it can, while still making good on its deposits. What happens to each bank's capital and leverage ratio