Bank A currently has $150M in assets, with $120M in deposits (only liability) and $30M in equity capital (all book values). Management has described that $20M of the total assets are liquid and could be quickly sold at their book value (e.g., cash and treasuries). The remaining $130M of total assets consists of illiquid assets such as loans and illiquid securities (e.g., MBS). In case these illiquid assets had to be quickly liquidated, they would be sold at a 30% discount of their book value. The bank has both insured and noninsured deposits, which are fully covered and not covered by deposit insurance, respectively. Insured and uninsured deposits are equal to $80M and $40M, respectively. Uninsured depositors in the bank are concerned about a potential run on the bank and there are only two dates in this example. Depositors have an option between running to the bank today to withdraw their deposits and waiting for tomorrow. Running to the bank today is costly (small cost).

Today: All depositors will decide to keep or not their deposits in the bank. The bank will allow all depositors to withdraw their deposits as long as it can raise funds to pay them. The bank cannot raise new equity or deposits. It will meet withdraws by first selling the liquid assets and then selling illiquid assets (when there are no liquid assets left).

Tomorrow: Regulators will evaluate the assets and deposits of the bank. If the assets are below deposits the bank will be declared insolvent and liquidated. The funds from the liquidation will be split among all depositors, and the deposit insurance will cover any possible loss on deposits among insured depositors. If the assets are greater or equal than the deposits the bank will not be liquidated and deposits will be worth their full value.

Suppose that depositors are expecting a run in the bank by all uninsured depositors today. Under this scenario, what will be the value of the banks assets and equity tomorrow?

Group of answer choices

The assets and equity will be 110 and 30, respectively.

The assets and equity will be 101 and 21, respectively.

The assets and equity will be 101 and 30, respectively.

The assets and equity will be 70 and 30, respectively.

The assets and equity will be 110 and 21, respectively.