Scenario: Alpha Bank has $100,000 in total assets and $45,000 in total liabilities. Beta Bank has $250,000 in total assets and $220,000 in total liabilities.
-Refer to the scenario above.What would happen to each bank if its total assets dropped by 20 percent?

Question

Quizplus · Accepted Answer

If Alpha Bank's total assets dropped by 20%, its total assets would be reduced to $80,000. Subtracting its total liabilities of $45,000 from this amount would leave it with $35,000 in equity, making it solvent. On the other hand, if Beta Bank's total assets dropped by 20%, its total assets would be reduced to $200,000. Subtracting its total liabilities of $220,000 would leave it with negative equity of -$20,000, rendering it insolvent. Therefore, Alpha Bank would still be solvent, and Beta Bank would be insolvent.

Scenario: Alpha Bank Has $100,000 in Total Assets and $45,000