In the "Choice and Consequence" box on "Asset Price Fluctuations and Bank Failures," the authors discuss the relationship between the prices of things like oil and real estate and the solvency of
lending institutions like banks. Consider the two scenarios below.
For each of the following balance sheets, supply the missing entries and then answer the questions that follow.
Assume that Securitas Bank is a large bank in the country of Hyponatremia. The bank's only assets and liabilities at the beginning of the year are given in the following balance sheet:
Securitas Bank Balance Sheet
Assets
Reserves and cash equivalents
Longterm investments
Total assets
Liabilities and Stockholders' Equity
Demand deposits
Borrowing from other banks
Stockholders' equity
Assume now that due to an economic downturn, the value the bank's longterm investments declines by
Show the resulting situation on the Securitas Bank balance sheet:
Securitas Bank Balance Sheet
Assets
Reserves and cash equivalents
Longterm investments
Total assets
Liabilities and Stockholders' Equity
Demand deposits
Borrowing from other banks
Stockholders' equity
$
$
$