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Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar

Chapter 29, Problem 7

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QUESTION:

Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which bank shows a larger change in bank capital? Does either bank remain solvent? Explain.

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QUESTION:

Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which bank shows a larger change in bank capital? Does either bank remain solvent? Explain.

ANSWER:

Step 1 of 2

The leverage ratio is an essential metric in banking, signifying the degree to which the bank's operations are funded by its equity

If we take as an example that the total asset of the bank A is $100, the leverage ratio is 10, then the borrowed amount of money is $90 and its capital is $10. When the value of assets falls by 7%, this bank would have $93 assets, and $90 would still be the borrowed money.

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