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Bank A has the following balance sheet: Assets Reserves $50 million Securities $50 million Loans $150 million Liabilities Deposits $200 million Bank capital $50 million
Bank A has the following balance sheet: Assets Reserves $50 million Securities $50 million Loans $150 million Liabilities Deposits $200 million Bank capital $50 million Bank B has the following balance sheet: Assets Reserves $50 million Securities $50 million Loans $150 million Liabilities Deposits $225 million Bank capital $25 million 1. Both banks earn $5 million as an annual after-tax profit. Calculate ROA (return on asset) and ROE (return on equity) for both banks. 2. If $ 30 million loans default, how should the bank balance sheet change? 3. From parts 1 and 2, explain the trade-off of holding low capital
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