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3. Managing Risk in the middle of a Bank Run!! Consider the following simplified balance sheet for ABC Bank in the last fiscal year: ASSETS LIABILITIES and EQUITY Cash $15 Deposits $120 Loans 95 Equity 30 Fixed Assets 40 Suppose that depositors unexpectedly withdraw $30 million in deposits. Notice that the bank does not have enough cash (reserves) to cover all these withdrawals! Assume that the bank cannot borrow any more funds in the short-term money markets either! Which means we cannot borrow money to pay those withdrawals. As a result, the bank decides to sell and liquidate some of its loan contracts on its assets. Since we will literally sell the loan contracts in a fire-sale we anticipate that loans will liquidate at 75 cents on the dollar. (a) Produce the new balance sheet of the bank after adjustments are made for the $30 million of deposit withdrawals and the subsequent depletion of cash and discount sale of loans. Recall that equity is a residual account and it should be balanced. (b) The next day ABC Bank receives new communication from the Fed demanding that I increase my reserves (cash balances) to meet the minimum reserve requirements. The bank is told to keep increasing its cash reserves until it equals 10 percent of remaining deposits. The only way to meet those requirements is to further liquidate loan contracts at the same fire-sale rate. Show the new balance sheet of the bank assuming again that the bank cannot borrow money from outside. Can the bank survive all this turmoil