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

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

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 23QTD

See similar textbooks

Related questions

Q: (Liquidity analysis) When firms enter into loan agreements with their bank, it is very common for…

A: a.Current assets = $1,908,026,400Current liabilities = $1,362,876,000The firm's current ratio is

Q: Unibank also needs to review its off-balance-sheet risk. Using the following balance sheet value of…

A: Over-the-Counter (OTC) Contracts:OTC agreements are bilateral contracts formed informally between…

Q: Assume that banks aim to hold no excess reserves. The AAA bank responds to the change in its reserve…

A: Reserve Ratio is the minimum proportion of total deposits that bank need to keep as reserves. A bank…

Q: If Bank A sells some its loans to Bank B for cash, everything else equal: bank a becomes less…

A: When bank A sells its loans to bank B, the total asset of bank A is not changing as there is a…

Q: Which of the following would increase a bank’s Net Interest Margin, assuming all else stays the…

Q: A company's current ratio is 2.0. Which of the following actions would lower the current ratio,…

A: Current ratio is one of the liquidity ratio of the business, which shows ratio between current…

Q: A lending officer at C Bank has insisted that your firm improve the current ratio of 0.8 before the…

A: To improve the current ratio, either current assets should increase or current liabilities decrease.

Q: For a bank with deficient capital ratios, which of the following actions could be required by…

A: This action would enhance liquidity but might not directly impact capital ratios, as cash is already…

Q: 1. Suppose that a financial institution has a negative $25 million difference between its assets and…

A: Introduction: Financial institution has negative $25 million meaning financial institution has…

Q: Rank the following types of bank liabilities, first according to their level of liquidity risk, and…

A: Liquidity represents the inability of the company to pay off its obligation that would affect the…

Q: If Nominal Interest Rate is 6% and the inflation premium is 2% the real interest rate earned by the…

A: Nominal interest rate is the stated rate of interest on the financial instrument whereas real…

Q: everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on…

A: Financial Ratio Analysis: Financial ratio analysis is one of the tools of financial analysis of a…

Q: (Liquidity analysis) When firms enter into loan agreements with their bank, it is very common for…

A: Assets are resources that are controlled which results from prior transactions that are expected to…

Q: National Bank has the following balance sheet (in millions) and has no off-balance-sheet activities:…

A: a) The leverage ratio is ($40 + $30)/$1,090 = 0.06422 or 6.422 percent.

Q: Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would…

A: The currant ratio is a short term liquidity measure ratio which can be calculated as follows Currant…

Q: When both deposit and loan interest rates decrease at the same speed in the market, a bank tends to…

A: Loan interest rate is the rate at which interest is charged by bank on the lent amount. Deposit is…

Q: As a result of the COVID-19 crisis, company A has decided to sell its receivables to a bank in…

A: Solution:- Discussion of the effect of this financial decision on the company's current ratio, quick…

Q: How should a bank structure its liquid assets portfolio to take advantage of falling interest rates…

A: Liquid assets are cash and assets that can be converted to cash quickly if needed to meet financial…

Q: Assume two banks are equal to each other in size in terms of total assets. The bank which has more…

A: Explanation: Yes, the bank that would have higher liquidity will have a lower return on equity. The…

Q: 4. Gap and Duration Analysis a. Take the following balance sheet, which of the assets and labilities…

A: GIVEN Gap and Duration Analysis is

Q: Construct a bank balance sheet with the following items : reserves , deposits , loans , securities ,…

A: All financial instruments are shown in single statement to know the exact position in financial…

Q: What are bank assets used for?

A: Standard Disclaimers“Since you have posted a question with multiple subparts, we will solve first…

Q: all of the following statements about a bank's capital are correct except: bank capital is the…

A: Bank’s capital is the lifeblood for its operations. It shows assets in the form of loan provided and…

Q: Suppose XYZ Bank reports interest-sensitive assets of $670 million and interest-sensitive…

A: Interest-sensitive gap = Interest-sensitive assets - Interest-sensitive liabilities…

Q: (Liquidity analysis) When firms enter into loan agreements with their bank, it is very common for…

A: In finance various financial ratios are used to assess the financial health of a company. One of…

Concept explainers

Balance Sheet Regulations

A balance sheet is a financial statement that shows the position of a company's assets and liabilities on a specific date. The balance sheet is prepared after preparing the statement of profit and loss statement (income statement). The balance sheet and other financial statements differ in the sense that the balance sheet shows the financial position at any given point in time. In contrast, the other financial statements show the financial performance over a particular duration.

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

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Introduction

VIEW

Explanation

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Which of the following transactions would result in an increase in capital employed? A. Paying a trade payable in cash B. Writing off a bad debt C. Purchasing on credit D. Repaying a loan E. Selling inventory at a profit F. Increasing the bank overdraft to purchase a non - current asset
all of the following statements about a bank's capital are correct except: bank capital is the cushion a bank has against a sudden drop in the value of its assets a bank is more profitable the more capital it holds bank capital decreases as interest rate increase bank capital is what would be left after a bank's owner sold all the assets and paind off all the liabilities
a) Bank A has the following balance sheet (in millions): Assets Cash Securities Loans Total assets $5 10 55 $70 Liabilities and equity Deposits Equity Total liabilities and equity The bank is expecting a $12 million net deposit drain. $62 8 $70 i) Show the new balance sheet if the bank uses purchased liquidity management to offset the expected drain. Also, explain the effect on the size and composition of assets and liabilities ii) Show the new balance sheet if the bank uses stored liquidity management to offset the expected drain. Also, explain the effect on the size and composition of assets and liabilities.
everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity: will remain constant will increase cannot be determined from the information provided will decrease
ith the LRR = 15%, assume that Bank (A) borrows $750,000 from the Fed at a discount rate of 10%. Assume that no leakage of money occurs outside the banking system, and that banks do not keep excess reserves at its desks. a) Write in words and numbers about the effect of this transaction on the balance sheet of Bank (A). b) Write in words and numbers about the effect of this transaction on the consolidated balance sheet of all banks. c) What is the effect on M-SS. Answer in words and numbers. d) What is this operation called & why? %3D
As a result of the COVID-19 crisis, company A has decided to sell its receivables to a bank in exchange for cash. What would be the effect of this financial decision on the company's current ratio, quick ratio and cash ratio?
If Bank A sells some its loans to Bank B for cash, everything else equal: bank a becomes less liquid while bank b becomes more liquid bank a's liabilities decrease by the amount of the loans that are sold bank A's assets decrease and bank b's assets increase banks a's total assets do not change, but bank a is more liquid
a) Bank A has the following balance sheet (in millions): Assets Cash Securities Loans Total assets $70 The bank is expecting a $12 million net deposit drain. Liabilities and equity Deposits Equity Total liabilities and equity $5 10 55 $62 9 $70 ii) Show the new balance sheet if the bank uses stored liquidity management to offset the expected drain. Also, explain the effect on the size and composition of assets and liabilities.
Give typing answer with explanation and conclusion A bank has the following assets: cash and government bonds of $31.07, government agency bonds of $22.3, mortgages of 66.21, and loans to individuals and corporations of 133.46. According to Basel 1, what is the ratio of the bank's risk-weighted assets to total assets? Express in % to the nearest 0.01%; drop the % symbol. Blank 1. Calculate the answer by read surrounding text.
6
In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the figures provided. All accounts are in billions of dollars.a. A decline in the discount rate prompts commercial banks to borrow an additional $1 billion from the Federal Reserve Banks. Show the new balance-sheet figures in column 1 of each table.b. The Federal Reserve Banks sell $3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet figures in column 2 of each table.c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet figures in column 3 of each table.d. Now review each of the above three transactions, asking yourself…
Given Bank A's Statement of Condition and Statement of Earnings, answer the next two questions: If the average net interest margin for this type of bank is 4.65 percent, then, ceteris paribus, this particular bank is performing