Question

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

Bankâs Balance Sheet
Assets Liabilities and Owners' Equity
Reserves $200 Deposits $1,600
Loans $800 Debt $250
Securities $1,000 Capital (owners' equity) $150
Suppose a new customer adds $100 to his account at Southwestern 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? Check all that apply.

The riskiness of each asset

The total value of liabilities

The size of the monetary base

Answer 1

Answer:

1. This would increase the loans account and increase the deposits account.

The customer added to his account by depositing money into it thereby increasing the bank deposits.

2. This would also bring the leverage ratio from its initial value of 13.33 to a new value of 14.

A bank's leverage ratio is calculated by dividing it's total assets by it's Capital.

The old Leverage ratio is therefore;

= 2,000/150

= 13.33

The newly created loan increased assets by $100 so;

= 2,100/150

= 14

3. The riskiness of each asset

Banking is a heavily regulated industry because it involves holding the finances of a lot of people. As such, banks need to be careful when allocating resources so as not to get into risky investments that may lead to them losing people's money. However, they also need to invest such that they make a profit. They need to therefore find a balanced risk rate that will give them enough profit but limit their risk exposure.