Question

Newbank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. the bank issues a $25 million commercial loan and another $25 million in mort gages, with the following terms:

mortgages: 100 standard 30-year fixed-rate mort gages with a nominal annual rate of 5.25% each for $250,000

commercial loan: 3-year loan, simple interest paid monthly at 0.75% per month.

If required reserves are 8%, what do the bank balance sheets look like? ignore any loan loss reserves.

Answer 1

Newbank's balance sheet shows $14 million in cash reserves, $25 million in commercial loans, $25 million in mortgages, $100 million in checkable deposits as liabilities, and $6 million in net worth (capital) after starting operations and conducting transactions under an 8% reserve requirement.

Step-by-step explanation:

When Newbank receives $100 million in checkable deposits and has an 8% reserve requirement, it must hold $8 million in required reserves.

If the bank started with $6 million in capital and has not incurred any other changes to its balance sheet, then after it issues $25 million in commercial loans and another $25 million in mortgages, its assets will increase accordingly. Here's what Newbank's simplified balance sheet would look like after these transactions:

• Assets:
• Cash Reserves: $6 million (initial capital) + $8 million (required reserves from deposits) = $14 million
• Commercial Loans: $25 million
• Mortgages: $25 million
• Liabilities:
• Checkable Deposits: $100 million
• Net Worth (Capital): $6 million

The commercial loan has a simple interest of 0.75% per month over 3 years, and each mortgage has a nominal annual rate of 5.25% for $250,000 over 30 years.