Impact of Accounting Definitions on Bank Capital: A Case Study of Fleecing National Bank, Exams of Health sciences

Download Impact of Accounting Definitions on Bank Capital: A Case Study of Fleecing National Bank and more Exams Health sciences in PDF only on Docsity! 07-10A MF 820 First Week 10A Exercise Exploring the Impact of Different Accounting Definitions for Bank Capital A prototype exam question which pulls together many strands of the course. Answers should be attempted before looking at the answer sheet. Suppose Fleecing National Bank has the Following Balance Sheet, constructed according to GAAP. Held to Maturity Assets 100 Insured Deposits 55 Uninsured Deposits 30 Subordinated Debt 10 Tangible Net Worth 5 Assume that none of the bank’s assets are designated for trading under FAS 115. Exercise is to show what would be recorded under different capital definitions as assets decline by different amounts. Three distinct cases: Case 1. Assets decline to 95 in market value; Case 2. Assets decline in market value to 90; Case 3. Assets decline in market value to 80. Query: How would GAAP and market values of “regulatory capital” components change in each case if all 30 in uninsured deposits were lost in a run? a. Assume bank would be able to raise 30 alternately in asset sales or by Fed borrowing. b. What would be market-value or economic balance sheet in each case? c. How do you think subordinated debtholders and deposit insurers should respond in each case? Why?