On Monday, a non-bank’s assets comprised $40bn “cash”, $100bn of securities plus other assets of $60bn. Long-term debt liabilities total $90bn and the only other debt is overnight repo borrowing which is collateralised by the securities with a 10% haircut.

1. What is the shadow bank’s leverage multiple?

Tuesday sees a 20% decline in the price of securities and the repo lender demands a larger haircut, say, 30%. At the close of business on Tuesday,

2. What is the shadow bank’s “cash” balance?

3. What is the size of the shadow bank’s balance sheet?

4. What has happened to the shadow bank’s leverage?

5. Would selling the “troubled” assets help this non-bank to improve its position? Briefly say why.