ECON 1009 Lecture Notes - Lecture 1: Balance Sheet, Life Insurance, Bank Reserves

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OC4629958

25 Jan 2023

School

University of Adelaide

Department

Economics

Course

ECON 1009

Professor

Raul Barreto

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Document Summary

Our objectives this week are for students to be able to at apply balance sheet principles to identifying leverage and net worth; and to describing the balance sheet of a central bank. Capital gains or losses and net worth. Individuals and households always own things and often have debts. The same is true of a small company and a giant corporation. The same is true of a bank, and even of a central bank (like the rba). The same is true of state government and a federal government (like the australian commonwealth government). What we own is our assets and what we owe is our liabilities. A balance sheet is an accounting document that records what an economic unit owns (its assets ) and owes (its. The difference between its assets and liabilities is called net worth, or equity, or capital. Balance sheets can be constructed for any economic unit.

Related Questions

Leverage

Consider the following balance sheets of two banks. These two banks have equal amounts of assets but are leveraged differently. Assume that there is no regulatory capital requirement.

Balance Sheet of Arch Bank
Assets		Liabilities and Net Worth
Outstanding Loans	$100,000	Deposits (Liabilities)	$80,000
		Capital (Net worth)	20,000
Total	$100,000	Total	$100,000

Balance Sheet of Medes Bank
Assets		Liabilities and Net Worth
Outstanding Loans	$100,000	Deposits (Liabilities)	$95,000
		Capital (Net worth)	5,000
Total	$100,000	Total	$100,000

a. Which bank has a lower leverage ratio?

b. Suppose both banks' assets increase by 10% to $110,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by _____% and Medes Bank's capital increases by _______%. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a _____ percentage increase in capital.

c. Now suppose all the items on the balance sheets of both banks return to their initial values. Suddenly, the banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by __________%, and Medes Bank's capital decreases by ______%. Therefore, if the value of assets is falling, a higher leverage ratio means a ________ percentage decrease in capital.

d. Under this second scenario, which bank is closer to insolvency?

apricotserval510

Describe and define in detail the balance sheet of

(a) a commercial bank

(b) a central bank

Moreover, identify the different positions on the balance sheets that allow you to calculate different monetary aggregates.

Explain as well how the two balance sheets are interlinked.

lemonhamster473

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent.

a. What is the maximum amount of new loans that Big Bucks Bank can make? $.

Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount.


Assets				Liabilities and net worth
		(1)	(2)			(1' )	(2' )

Reserves	$22,000	$	$	Checkable deposits	$100,000	$	$
Securities	38,000
Loans	40,000

b. By how much has the supply of money changed? $.

c. How will the bankâs balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'.

d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make? $.

Show in columns 3 and 3' (below) how the bankâs balance sheet will appear after the bank has lent this additional amount.

By how much has the supply of money changed? $.


Assets				Liabilities and net worth
		(3)	(4)			(3' )	(4' )

Reserves	$22,000	$	$	Checkable deposits	$100,000	$	$
Securities	38,000
Loans	40,000

How will the bankâs balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.

pinkantelope545

ECON 1009 Lecture Notes - Lecture 1: Balance Sheet, Life Insurance, Bank Reserves

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