Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent of (1/8th) of the deposit in reserve. It uses the rest of the assets to make bank loans.
a) Show the balance sheet of happy bank
b) What is happy bank leverage ratio?
c) Suppose 10% of the borrowers from happy bank default and these bank loans become worthless. Show the bank's new balance sheet.
d) By what percentage do the bank's total assets decline? By what percentage does the bank's capital decline? Which change is larger? Why?