1. (a) Construct a balance sheet for an Australianbank consisting of four items (loans, reserves, deposits, capital).In Year 1, this balance sheet hasthe following characteristics:

Total assets = $1000m

Ratio of capital to assets = 20%

Ratio of Reserves to total assets = 10%

(b) Suppose that inYear 1

• half of deposits were denominated in US dollars and half in Australian dollars
• the exchange ratein that yearwas $1 US = $1 Australian

What happens to the balance sheet inYear 2 if the Australian dollar exchange rate depreciates by 10% against the USdollar, so that now $1 Australian =$0.90 US. (Hint: you need to express all items on the balance sheet interms ofAustralian dollars.)

(c) Using this example, explain why widespread foreign currency borrowing can put an economy at risk of a financial crisis.