Consider a simple bank that has assets of $90, checking deposits of $70, and cap
ID: 1203555 • Letter: C
Question
Consider a simple bank that has assets of $90, checking deposits of $70, and capital of $20. Recall from chapter 4 that checking deposits are liabilites of a bank. Complete the bank's balance sheet Now suppose that the perceived value of the bank's assets falls by 10. The new value of the hank's capital is $J0 Suppose the deposits are insured by the government. Given the decline in the value of bank capital A. there is still no need to withdraw funds because it is fine for banks to have a reduction in capital value. Ob the health of the bank is irrrelevant to depositors and therefore there is no need to withdraw funds. c depositors should be concerned that the bank may fail and should withdraw the funds from the deposits. D. even though the health of the bank is irrrelevant to depositors, the safe thing to do would be to withdraw the funds from the deposits.Explanation / Answer
The correct option is A
Explanation : -
Assets = Liabilities + Net worth
If the perceived value of the bank's assets fall by 10 ; the new value of the bank capital is $ 10 and the value of its assets is $ 80 .
$ 80 = $ 70 + $ 10
The bank is still financially healthy because its assets is still greater than its liabilities it has in the form of checking accounts . Therefore there is no need to withdraw funds because it is fine for banks to have a reduction in capital value . The value cannot go further down where its assets is lesser than its liabilities , if assets go less than liabilities then it is a serious balance sheet problem and the bank faces a serious threat of insolvency .