Suppose that as a result of a housing price decline, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. Call the securitized assets "troubled assets." The value of the other assets remains at 50. As a result of the uncertainty about the value of the bank's assets, lenders are reluctant to provide any short-term credit to the bank.

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Business

Jerimiah Phelps

30 October, 17:02

Suppose that as a result of a housing price decline, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. Call the securitized assets "troubled assets." The value of the other assets remains at 50. As a result of the uncertainty about the value of the bank's assets, lenders are reluctant to provide any short-term credit to the bank.

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Emma Berg · Answer 1

Recapitalization will be a better policy than buying the troubles assets because, buying troubled assets will at most case provide a bank liquidity but not necessarily a positive capital.

Explanation:

From the question, we recall the following,

The firm has three assets which are 50 of untroubled assets, 25 of troubled assets and 25 of treasury bonds

The Securitized assets will be now 50-25 = 25

The value other assets will remain at = 50

The Treasury bonds will be 50-25=25

The Short term credit will remain at = 80

The Capital will be = 20

Securitized assets. 25. Short term credit 80

Other assets.=50 and capital = 20

The Treasury bonds=25