Consider two banks, call them ABC and YXZ. On January 1, 2019, bank ABC had reserves of $15 billions, loans of $85 billions and no other assets, while bank XYZ had reserves of $30 billions, loans of $70 billions and no other assets. Also, on January 1, 2019, bank ABC had deposits of $96 billions and no other liabilities, while bank XYZ had deposits of $90 billions and no other liabilities. During the first quarter of 2019, the net income of Bank ABC was $1.0 billion while net income of bank XYZ was also $1.0 billion.

a) Calculate the rate of return on assets, ROA, and the rate of return on equity, ROE, of each of the two banks during the first quarter of 2019. Explain why ROE of bank ABC is significantly higher than ROE of bank XYZ.

b) Suppose that at the end of first quarter, both banks experienced 5% default on their loans. Assuming no other changes, find the equity of each bank after the 5% loan defaults.

c) Explain why does the 5% default on loans leads to insolvency of bank ABC, not of bank XYZ.