5c, 5d, 5e

5. Suppose the Dewey, Cheatem, and Howe National Bank has the following assets and liabilities. Assets: $150M of reserves, $1000M of Commercial Loans, $500M of Mortgages, $250M of Government Securities. Liabilities: $1200M of Deposits, 400M of short-term CDs. Banks are required to hold 10% of deposits in the form of reserves. Furthermore, banks are required to maintain a risk adjusted capital asset ratio of 20% and a non-risk adjusted capital asset ratio 10%. The weights for risk adjusted asset value is 1 for commercial loans,.5 for mortgages and zero for reserves and government securities. a. (5 points) Write out Dewey, Cheatem, and Howe National Bank's balance sheet (T-account). b. (5 points) What is the amount of bank capital? Does this bank have sufficient capital to satisfy the capital/unadjusted asset ratio (show work)? Does this bank have sufficient capital to satisfy the capital/risk adjusted asset ratio. c. (5 points) Suppose there is a decline in house prices that lowers the market value of mortgages by 20%. Show the balance sheet of the bank? Is the bank solvent (capital>0)? Does the bank satisfy its unadjusted capital/asset ratio? Does it satisfy its risk adjusted capital/asset ratio? d. (5 points) Suppose regulators insist that a capital injection occur to meet the risk adjusted capital/asset ratio. Suppose that the capital injection is immediately loaned out as commercial loans. What is the size of the injection required? e. (5 points) Suppose after the injection occurs, there is a deposit withdrawal of STOOM. After meeting the deposit withdrawal, does the bank have enough reserves to meet its reserve requirement? Suppose government securities are very liquid (easy to convert to reserves) but the commercial loans and mortgages are not and that borrowing additional funds is not practical, what will the balance sheet look like after the bank has made adjustments in response to the deposit withdrawal