A city bank has operations with $9 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 million in mortgages with the following terms: 200 standard, 30-year, fixed rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 8%. The city bank has the following balance sheet.

Assets

Required Reserves Excess Reserves Loans

$10.4 million $53.6 million $75.0 million

Liabilities

Checkable Deposits $130 million Bank Capital $ 9 million

a. Suppose city bank invest $50 million of excess reserves in mortgage loans. However, unexpectedly mortgage rates jump to approximately 13%, implying a present value of the banks current mortgage holding of $125,000 per mortgage. Bank regulators force the bank to sell its mortgages to recognize the fair market value. What does the bank's balance sheet look like? How do these events effect its capital position?

a. In the above situation so as to avoid insolvency, regulators provide the bank with $25 million in bank capital. What will the new balance sheet look like?

b. The news of intervention by regulators hit the newspapers causing depositors to withdraw $30 million. What will the balance sheet look like after the capital injection and run on the bank?