Consider a simple bank that has assets of $120, short-term credit of $100, and c
ID: 1203559 • Letter: C
Question
Consider a simple bank that has assets of $120, short-term credit of $100, and capital of $20. Short-term credit must be repaid or rolled over (borrowed again) when it comes due. Complete the bank's balance sheet Now suppose that the perceived value of the bank's assets falls. If lenders become nervous about the solvency of the bank making loam is not any riskier so lenders will still be willing to provide credit at low interest rates. even though giving the bank a loan is not any riskier, the bank will not have as much collateral to borrow from. making loans become riskier but lenders believe in banks and will be willing to provide credit at low interest rates. making loans become riskier and lenders will not be as willing to provide credit at low interest rates. Assuming the bank cannot raise additional capital, how can it raise the fundi necessary to repay its debt coming due? The bank can borrow by issuing bonds.Explanation / Answer
Bank’s balance sheet will be as follows:
Asset Liability
Bank Assets = $120 Short Term Credit = $100
Net Worth
Capital = $20
Correct Answer:
D. Making loan become riskier and lenders will not be as willing to provide credit at low interest rates
Explanation:
In the event of loan becoming riskier, interest rate will increase so that lenders find an incentive to give loans. Thus, in the given case also, loans at same lower interest rate will not be issued.