4. Use the following balance sheet to answer parts a - c.

• Checkable Deposits $2,000
• Bank Capital $3,200
• Reserves $200
• Securities $1,000
• Loans $4,000

a. If the Return on Assets for this bank is 25%, what are the net profit after taxes and the Return on Equity?

b. If there is a 10% reserve requirement, what will happen to the balance sheet if a customer withdraws $500 from their checking account? Use one accepted bank practice to bring the T-Account back into balance (i.e. edit the T-Account to reflect the change in deposits and to reflect your bank practice employed to bring the bank back into balance).

c. Assume that the deposit withdrawal from part b has not occurred. Based upon economic forecasts, you believe that 20% of your loans may be uncollectible. From a capital adequacy management perspective, how troublesome is this for the bank? What is the break even percentage of bad loans for this bank to become insolvent?