Consider the following balance sheets of two banks. These two banks have equal amounts of assets but are leveraged differently. Assume that there is no regulatory capital requirement. Which bank has a higher leverage ratio? Supply Bank Demand Bank Suppose both banks' assets increase by 25% to $250,000. Assume that the liabilities of both banks remain the same. Supply Bank's capital increases by, and Demand Bank's capital increases by. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 10% to $180,000. Again, assume that the liabilities of both banks remain the same. Supply Bank's capital decreases by, and Demand Bank's capital decreases by Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? Demand Bank Supply Bank