Going back to the original T-account (i. the withdrawal of part d.

a.    Going back to the original T-account (i.e. the withdrawal of part d. did NOT take place), Suppose that due to the mortgage crisis some people default on their loans, and their value thus decreases by 50. What happens to the leverage ratio (assuming the bank makes no changes in reserves)? (2 marks)

The leverage ratio increases to 66.667 %. This is caused by the decrease in loan assets to the bank. Debts creep closer to the value of equity of the bank while reserve levels remain constant.

 
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