Question

If a bank is forced to write off bad loans, what item on a bank's balance sheet act as a safety net to prevent bank failure should reserves run low

Answer 1

Bank capital

Step-by-step explanation:

Banks keep reserves that are used to serve customers. In the case where the bank reserves run low as a result of loan write off the next balance sheet item that the bank can fall back on is capital.

Banks are required to keep a particular level of net worth or capital in case of insolvency these can be sold to finance the bank's activities.

Having large capital means the bank can get high income to cover emergencies like bank runs.

Assets are expected to exceed liabilities. When liabilities exceed assets the bank is sadi to have negative net worth and the FDIC has the right to close such banks