Question 4

Suppose Chase Bank holds $190 million in assets, 8 million bank capital, which are composed of the following:

Required Reserves: $15 million

Excess Reserves: $5 million

Mortgage Loans: $100 million

Corporate Bonds: $60 million

Stocks: $60 million

Commodities: $10 million

a.Do you think there are some assets that Chase bank should not hold? Why or why not? Is the bank well capitalized? (12 marks)

b.If the housing market suddenly crashed, would Universal Bank be better off with a mark-to-market accounting system or the historical-cost system? (4 marks)

c.If the price of commodities suddenly increased sharply, would Universal Bank be better off with a mark-to-market accounting system or the historical-cost system? (4 marks)

d.What do your answer to (b) and (c) tell you about the tradeoffs between the two accounting systems? (4 marks)