The table below shows Southern Rock Bank's balance sheet in the form of a T-account: ASSETS LIABILITIES and BANK CAPITAL $550 million $350 million Government bonds Loans Deposits with central bank Cash in vault Other assets $200 million Deposits $620 million Bonds payable $65 million $15 million $100 million Bank capital Total liabilities and bank capital Total assets a. Complete the T-account. b. Bonds and deposits appear on both the assets side and the liabilities side. Explain what the entries mean and why this is not an error. c. Suppose the capital requirement is 10%. Verify that Southern Rock Bank currently meets the capital requirement. d. If borrowers declare that they cannot pay $120 million of loans, the value of Southern Rock Bank's assets falls by 12 percent. In this scenario, is Southern Rock Bank insolvent? e. Suppose the central bank raises the capital requirement to 15%. Southern Rock Bank can meet the new capital requirement in a few ways. One way is to deleverage, i.e., sell assets to pay off liabilities. By how much must Southern Rock Bank's assets and liabilities be reduced to meet the new capital requirement? f. Another way is for Southern Rock Bank to recapitalize, i.e., get investors to add their own funds to bank capital, in return for getting a share of the bank's ownership. Suppose it uses the proceeds of its new shares issue to pay down liabilities. How many dollars must it raise from its new shares issue to meet the new 15% capital requirement? The table below shows Southern Rock Bank's balance sheet in the form of a T-account: ASSETS LIABILITIES and BANK CAPITAL $550 million $350 million Government bonds Loans Deposits with central bank Cash in vault Other assets $200 million Deposits $620 million Bonds payable $65 million $15 million $100 million Bank capital Total liabilities and bank capital Total assets a. Complete the T-account. b. Bonds and deposits appear on both the assets side and the liabilities side. Explain what the entries mean and why this is not an error. c. Suppose the capital requirement is 10%. Verify that Southern Rock Bank currently meets the capital requirement. d. If borrowers declare that they cannot pay $120 million of loans, the value of Southern Rock Bank's assets falls by 12 percent. In this scenario, is Southern Rock Bank insolvent? e. Suppose the central bank raises the capital requirement to 15%. Southern Rock Bank can meet the new capital requirement in a few ways. One way is to deleverage, i.e., sell assets to pay off liabilities. By how much must Southern Rock Bank's assets and liabilities be reduced to meet the new capital requirement? f. Another way is for Southern Rock Bank to recapitalize, i.e., get investors to add their own funds to bank capital, in return for getting a share of the bank's ownership. Suppose it uses the proceeds of its new shares issue to pay down liabilities. How many dollars must it raise from its new shares issue to meet the new 15% capital requirement
