Question

Bank's 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 Northeastern Mutual Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans account anddecrease 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? Check all that apply.

Its intended goal is to protect the interests of those who hold equity in the bank.
It specifies a minimum leverage ratio for all banks.
The higher the percentage of assets a bank holds as loans, the higher the capital requiremen

Answer 1

This would increase the loans account and increase the deposits account. The initial value of 13.33 to a new value of 14. The higher the percentage of assets a bank holds as loans, the higher the capital requirement. Thus, option (c) is correct.

What is a Balance Sheet?

The balance sheet and details of reconciled transactions for each account are the two most important reports that the accountant will want.

(a) This would increase the reserves account and increase the deposits account.

(b) The bank leverage ratio refers to its Assets divided by Capital (Owner's equity).

Liabilities should match assets. Therefore, keeping both sides equal by adding $100.

= (Reserves + loans + securities)/Capital

= (200 + 800 + 1,000) / 150

initial value of 13.33

After the $100 was borrowed

= (200 + 800 + 1,000 + 100) /150

new value of 14

(c) The capital requirement increases as the proportion of an institution's assets held as loans rises. Given that loans are made from deposits, the capital requirement is intended to safeguard depositors in the event that loans are defaulted upon.

Hence, the significance of the Balance Sheet is aforementioned.

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