FRM Part I · FRM Exam Part I · Banks
A bank has the following: loans USD 700m, securities USD 200m, cash USD 100m (total assets USD 1,000m). Liabilities: deposits USD 850m, equity USD 150m. Loans lose 10% of value and securities lose 5% of value, with no other changes. What is the bank's equity after these losses, and does it remain solvent?
Losses are 10% of 700 plus 5% of 200, which is 70 plus 10 equals USD 80m. Equity falls from 150 to 70, confirmed by assets of 920 less deposits of 850. Equity remains positive, so the bank is still solvent.
- AUSD 80m; solventCorrect
- BUSD 150m; solvent
- CUSD 70m; solvent
- DUSD 0; insolvent
Explanation
Loan loss = 0.10 x 700 = 70; securities loss = 0.05 x 200 = 10; total 80. Equity = 150 - 80 = 70. Check: assets = 1,000 - 80 = 920; minus deposits 850 = 70. So equity is USD 70m and the bank is solvent.
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