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Question
The bank keeps a capital-to-asset ratio of 8%. If the bank does not securitize the mortgages, they will be fully funded with demand deposits that have a reserve requirement of 10%. The demand deposits also have a deposit insurance premium of 0.20 cents per $100 of deposits. If the bank securitizes the mortgages, how much less capital will the bank require? If the savings from not having the required reserves and the deposit insurance premiums could be invested at 5%, what is the dollar opportunity cost of not securitizing?
Answer
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