Modern Monetary Theory points out that banks in the real world are not constrained by the level of their deposits but rather by their level overall risk based on their capitalization or "leverage ratio". Suppose a bank balance sheet looked like this with a 5% required reserve ratio.

Assets		Liabilities		Net Worth
Reserves	$100	Deposits	$2,000
Loans	$1,000
Treasury Bills	$0
Other investments	$1,900.00
	$3,000.00		$2,000.00	$1,000.00
Leverage				1.0

a. How would this balance sheet change if the bank provided a $1,000 loan to one of its depositors who deposited this loan back in the bank?

b. What would this do the bank's capitalization or "leverage ratio"?

c. Would the bank still be in reserve requirement compliance? One way to get back into compliance would be to sell some of its other investments to raise reserve cash. What would the bank balance sheet than look like?

d. Now suppose $1,500 of the bank's $2,000 in loans had to be written off as they were "non-performing" (borrowers could not pay them back). What would the bank's balance sheet then look like? What would be the bank's net worth?

e. What does the balance sheet in d) imply about the relationship between bank created money, leverage, and risk?