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

Bank's Balance Sheet

Assets Liabilities and Owners' Equity

Reserves $175 Deposits $1,400

Loans $700 Debt $225

Securities $875 Capital (owners' equity) $125

Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and (increase/decrease) the (capital/debt/deposits/loans/reserves) account.

This would also bring the leverage ratio from its initial value of (14/14.8/16.1/18.2) to a new value of (14/14.8/16.1/18.2).

The explanation is given as follows.

Explanation:

Task 1:

The higher the percentage of assets a bank holds as loans, the higher the capital requirement.

When the owners of the bank borrow $100 to supplement their existing reserves, both reserves and debt increase by $100, therefore increase in debt as in any balance sheet, the total value of accounts on the left hand should be equal to the right hand, so when there is increase in reserves, there will be increase in debt.

Task 2:

It specifies a minimum leverage ratio for all banks

leverage ratio initially = total assets / capital = 1750 / 125 = 14

leverage ratio new value = total assets / capital = 1850 / 125 = 14.8 (the assets increase by $100 with increase in reserves)

Task 3

Its intended goal is to protect the interests of those who hold equity in the bank.

Capital requirement are there to ensure that bank have enough capital to repay the depositors and debtors and if a bank holds a higher percent of risky assets, capital requirements will be higher so that the bank remains solvent hence option a is right answer.