Question
A bank has the following balance sheet for 2020.Also shown are the respective interest rates: Assets amount ($MM) rate, % Business Loans506 Corporate Bonds265 Government
A bank has the following balance sheet for 2020.Also shown are the respective interest rates:
Assetsamount ($MM)rate, %
Business Loans506
Corporate Bonds265
Government Bonds182.5
Cash7
Real assets2
Liabilities
Demand Deposits360
Time Deposits451.1
Inter-Bank Borrowing161.25
Preferred Equity1
Common Equity5
Off-Balance Sheet Item
Of the business loans above, $10MM was drawn from a $35MM Credit Line.That is, assume the average amount of the Line drawn during the year is $10MM.The bank charges 0.25% for unused lines of credit.
IISuppose capital requirements are:
8% for loans
4% for bonds with risk of default
4% for inter-bank lending
2.5% for undrawn credit lines
A.Does the bank have enough capital?
B.What if the capital requirement for loans increases to 10%?Which of the following will "cure" the deficiency - entirely, partially or not at all:
1.The bank issues new shares with a market value of $2mm and uses the funds to make $2mm in new business loans.
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