Consider a bank that has assets of $100, capital of $20, and shon-term credt of $80 Among the bank's assets are securitized assets whose value depends on the price of houses These assets have a value of $50 Assets Securitized assets Other assets Liabilities Shorl-term cred Net Worth Capital Suppose that as a resuh of a housing price decine, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. value of the bank's assets, Jenders are relactant to provide any short-term credit so the bank Call the securifized assets Troubled assets. The value of the other assets remains at 50. As a result of the uncertainty about the Suppose instead of buying the troubled assets, the government provides capital to the bank by buying ownership shares uith the intention of selling the shares again when the markets stablize (This is what the TARP ulimately became) The govemment exchanges treasury bonds (which become assets for the bank) for ownership shares To keep scenario ( capital posiltive and the bank solvent, suppose the gevemment exchanges 25 of Treasury bonds for ownership shares Assuming the worst case so that the troubled assets are worth only 25), set up the new balance sheet of the bank Remember t Remember that the tim now has three assels S0 of untroubled assetis, 25 of troubled assets and 25 of beasury bonda) Assets cack to select your answerts) Consider a bank that has assets of $100, capital of $20, and shon-term credt of $80 Among the bank's assets are securitized assets whose value depends on the price of houses These assets have a value of $50 Assets Securitized assets Other assets Liabilities Shorl-term cred Net Worth Capital Suppose that as a resuh of a housing price decine, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. value of the bank's assets, Jenders are relactant to provide any short-term credit so the bank Call the securifized assets Troubled assets. The value of the other assets remains at 50. As a result of the uncertainty about the Suppose instead of buying the troubled assets, the government provides capital to the bank by buying ownership shares uith the intention of selling the shares again when the markets stablize (This is what the TARP ulimately became) The govemment exchanges treasury bonds (which become assets for the bank) for ownership shares To keep scenario ( capital posiltive and the bank solvent, suppose the gevemment exchanges 25 of Treasury bonds for ownership shares Assuming the worst case so that the troubled assets are worth only 25), set up the new balance sheet of the bank Remember t Remember that the tim now has three assels S0 of untroubled assetis, 25 of troubled assets and 25 of beasury bonda) Assets cack to select your answerts)
