$(52$ points $-$ Bank's Balance Sheet, Capital Adequacy, and Money Supply$)$ Suppose the Krusty Krab

Bank wishes to $($I$)$ keep the minimum of $20\%$ reserves of deposits, and $($II$)$ banks are legally required to

maintain its total equity at $15\%$ of risk$-$adjusted assets. The current balance sheet of Krusty Krab Bank is:

The percentage in the squared bracket $[]$ represents the risk weight of each asset.

$($a$)(1$ point$)$ What is the equity multiplier $($accounting leverage$)$ of this bank?

$($b$)(3$ points$)$ Find the risk$-$adjusted assets. Show your calculation.

$($c$)(1$ point$)$ What is the fraction of reserve$-$to$-$deposits $-$ that is$,$ how much of a dollar deposited is kept?

$($d$)(4$ points$)$ Are the banks in compliance with requirements $($I$)$ and $($II$)?$ Why or why not? Explain.

Scenario $1-$ In addition to requirement $($II$),$ new regulations now require banks to maintain its Tier $1$

equity at $12\%$ of risk$-$adjusted assets.

$($e$)(4$ points$)$ Is the bank in compliance with the new regulations? Explain.

Scenario $2-$ Instead of Scenario $1,$ suppose $$600$ of credit cards loans are in default and written off the

balance sheet.

$($f$)(6$ points$)$ Describe the immediate change$($s$)$ to the bank's balance sheet $($No need to create an entire

balance sheet, simply express the change$($s$).)$ Is the bank in compliance with all the requirements?

Scenario $3-$ Instead of Scenarios $1$ and $2$ and reverting to the balance sheet as originally provided, the

Federal Reserve conducts the open market purchase of $$7,000$ worth of Treasury securities$.$ That is$,$ the

Fed buys $$7,000$ of Treasury securities from this bank and gives $$7,000$ of Reserves to the bank.

$($g$)(2$ points$)$ Describe the immediate change$($s$)$ to the bank's balance sheet $($No need to create an entire

balance sheet, simply express the change$($s$).)$

$($h$)(9$ points$)$ How much of additional loans could the bank make as BBB$+$ Corporate Loans?

$($i$)(4$ points$)$ Suppose all banks have similar balance sheets. Comparing to before the Fed's action, what

would happen to the money multiplier after Fed's action in Scenario $3?$ If money multiplier has changed,

explain why.

Scenario $4-$ In addition to the transactions in Scenario $3,$ suppose that $$300$ of the Long$-$term

Convertible Debt is also converted to Common Stock.

$($j$)(9$ points$)$ With the combined transactions in Scenario $3--$ would your answers to $($h$)$ change? Why or

why not? If it is possible to make loans, what is the maximum amount the bank can lend as BBB$+$

corporate loans?

Scenario $5-$ In addition Scenarios $3$ and $4,$ suppose the bank relaxes its own Requirement $($I$)$ of

minimum reserves holding. It now desires to keep the minimum of $10\%$ reserves of deposits.

$($k$)(9$ points$)$ How would this change your answers to $($j$)?$ Explain.