The more bank capital the bank holds on its balance sheet, the better off are its equity holders. Is this true, false or uncertain? Explain.

2.) Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 15 percent.

Assets

Liabilities

Reserves

$40 million

Deposits

$200 million

Loans

$160 million

Bank Capital

$20 million

A. True

B. Required reserve = $30 million, Excess reserve = $10 million.

Explanation:

Requirement A

The statement is true because if the bank has vast capital, It can further reinvest that capital into various businesses. If it can reinvest the money, the bank can earn more revenues. More earnings of the bank lead to enable the confidence of the investors as the bank can provide more dividends to its shareholders.

Requirement B

We know,

Required reserve = Deposits * Required Reserve Ratio

Given,

Deposits = $200 million

Required Reserve Ratio = 15%

Therefore, Required reserve = $200 * 15%

Required reserve = $30 million

From the balance sheet, we can say that there is an excess reserve.

Excess reserve = Reserves - Required reserve

Excess reserve = ($40 - $30) million.

Excess reserve = $10 million.