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Chapter 10: Q. 21 (page 284)

To avoid insolvency, regulators decide to provide the bank with \(27 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, \)40 million in deposits is withdrawn.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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Most popular questions from this chapter

How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

Suppose that after a few mergers and acquisitions, only one bank holds 70% of all deposits in the United States. Would you say that this bank would be considered too big to fail? What does this tell you about the ongoing process of financial consolidation and the government safety net?

Go to the St. Louis Federal Reserve FRED database, and find data on the number of commercial banks in the United States in each of the following categories: average assets less than \(100 million (US100NUM), average assets between \)100 million and \(300 million (US13NUM), average assets between \)300 million and \(1 billion (US31NUM), average assets between \)1 billion and \(15 billion (US115NUM), and average assets greater than \)15 billion (USG15NUM). Download the data into a spreadsheet. Calculate the percentage of banks in the smallest (less than \(100 million) and largest (greater than \)15 billion) categories, as a percentage of the total number of banks, for the most recent quarter of data available and for 1990:Q1. What has happened to the proportion of very large banks? What has happened to the proportion of very small banks? What does this say about the “too-big-to-fail” problem and moral hazard?

Banking crises have occurred throughout the world, like the Finnish banking crisis of 1990s, the 2002 Uruguay banking crisis, and the 2003 Myanmar banking crisis. In this context, what similarity do we find when we look at various different countries?

What are the costs and benefits of a too-big-to-fail policy?

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