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Use the information presented in Northeastern Mutual Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $175 Deposits $1,400
Loans $700 Debt $225
Securities $875 Capital (owners' equity) $125
Suppose the owners of the bank contribute an additional $200 from their own funds and use it to buy securities in the name of the bank. This would increase the securities account and the account. This would also bring the leverage ratio from its initial value of to a new value of . Which of the following is true of the capital requirement?
A. The higher the percentage of assets a bank holds as loans, the higher the capital requirement.
B. It specifies a minimum leverage ratio for all banks.
C. Its intended goal is to protect the interests of those who hold equity in the bank.

User Pyano
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1 Answer

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Answer and Explanation:

In the case when the bank borrow $200 so it would be increase the capital account

The initial value of the leverage ratio is

= total assets ÷ total equity

= (Reserves+ loans+ securities) ÷ (owner's enquity)

= ($175 + $700 + $875) ÷ $125

= $1750 ÷ 125

= 14

Now the new value of the leverage ratio is

= total assets ÷ total equity

= (Reserves+ loans+ securities) ÷ (owner's enquity)

= ($175 + $700 + $875 + $200) ÷ $125 +

= $1950 ÷ $125

= 15.6

The statement i.e. true for the capital requirement is that the more the percentage of the asset the bank hold the greater the capital requirement

User PGilm
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