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This question was created from Mishkin Chapter 10 Answers Economic Analysis of Financial Regulation https://www.coursehero.com/file/18155947/Mishkin-Chapter-10-Answers-Economic-Analysis-of-Financial-Regulation/

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19. Oldhat Financial starts its first day of operations with $9 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 million in mortgages with the following terms: 200 standard, 30-year, fixed-rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 8%.a. What does the bank balance sheet look like?b. How well capitalized is the bank?c. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat's first day. 20. Early the next day, the bank invests $50 million of its excess reserves in commercial loans. Later that day, terrible news hits the mortgage markets, and mortgage rates jump to 13%, implying a present value of Oldhat's current mortgage holdings of $124,798 per mortgage. Bank regulators force Oldhat to sell its mortgages to recognize the fair market value. What does Oldhat's balance sheet look like? How do these events affect its capital position? 21. To avoid insolvency, regulators decide to provide the bank with $25 million in bank capital. However, the bad news about the mortgages is featured in the local newspaper, causing a bank run. As a result, $30 million in deposits is withdrawn. Show the effects of the capital injection and the bank run on the balance sheet. Was the capital injection enough to stabilize the bank? If the bank regulators decide that the bank needs a capital ratio of 10% to prevent further runs on the bank, how much of an additional capital injection is required to reach a 10% capital ratio?

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20. To avoid insolvency, regulators decide to provide the bank with $25 million in bank capital.
However, the bad news about the mortgages is featured in the local newspaper, causing a
bank run. As a result, $30 million in deposits is withdrawn. Show the effects of the capital
injection and the bank run on the balance sheet. Was the capital injection enough to stabilize
the bank? If the bank regulators decide that the bank needs a capital ratio of 10% to prevent further runs on the bank, how much of an additional capital injection is required to reach a
10% capital ratio ? The effect of the capital injection and bank run are shown in the balance sheet below: Assets Liabilities
m
Excess Reserves $26 million Bank Capital $ 9 million
Loans $75 million The bank now has a 9/109 0 8.3% capital ratio; it is again well capitalized. With the run on
the bank, checkable deposits fall to $100 million. In order to have a bank capital ratio of
10%, it must be the case that 0.10 I] BC/(lOO 0 BC ), where BC represents the required level
of bank capital. Solving for BC yields a level of bank capital needed of $11.1 million. Thus,
the regulators would need to inject an additional $2.1 million to reach a 10% capital ratio.

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