Question

Banking requirements

Use the information presented in Midwestern Mutual Bank's balance sheet:
Bank's Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $200 Deposits $675
Loans $800 Debt $250
Securities $1,000 Capital (owners' equity) $1,075
Suppose a new customer adds $100 to his account at Midwestern Mutual Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans 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 do bankers take into account when determining how to allocate their assets?
A. The total value of liabilities.
B. The size of the monetary base.
C. The return on each asset.

Answer 1

Answer and Explanation:

In the case when the new customer added $100 to his account so this would rise the loan amount also at the same time it increased the reserve and debt account

The leverage ratio is

= Total asset ÷ equity

= $2,000 ÷ $1,075

= 1.8604

Now the new leverage ratio is

= $2,000 + $100 ÷ $1,075

= 1.9534

So the initial leverage ratio is 1.86 to the new value of 1.95

The bankers should taken into account for distributing the asset is return on each asset