Bank capital is important since it constrains bank owners (and their agents, the bank managers) from engaging in risky lending at the depositors and FDIC expense, i.e. moral hazard. The idea being that the more the owners of the bank have contributed to the bank's operation, the more they have to lose in the face of a liquidation. A leverage ratio is any one of several financial measurements that look at how much capital a firm holds in relation to its total assets. For our purposes we define the bank's leverage ratio as equity capital divided by total assets.* Go to the St. Louis Federal Reserve FRED database, and find data on assets less liabilities, i.e. bank capital (RALACBM027SBOG), and total assets of commercial banks(TLAACBM027SBOG). Starting in January 1973 until December 2020, using the FRED web-based graphing tool (not the Excel add-on), calculate the bank leverage ratio and create a line graph of the leverage ratio over this sample (include the graph you created as part of your submission). Given the path of bank leverage since 2004, what can you conclude about moral hazard in the banking system over that time period? * - Just to show how nebulous is the definition of the leverage ratio, the inverse of this ratio is also called a leverage ratio in other contexts.
Bank capital is important since it constrains bank owners (and their agents, the bank managers) from engaging in risky lending at the depositors and FDIC expense, i.e. moral hazard. The idea being that the more the owners of the bank have contributed to the bank's operation, the more they have to lose in the face of a liquidation. A leverage ratio is any one of several financial measurements that look at how much capital a firm holds in relation to its total assets. For our purposes we define the bank's leverage ratio as equity capital divided by total assets.* Go to the St. Louis Federal Reserve FRED database, and find data on assets less liabilities, i.e. bank capital (RALACBM027SBOG), and total assets of commercial banks(TLAACBM027SBOG). Starting in January 1973 until December 2020, using the FRED web-based graphing tool (not the Excel add-on), calculate the bank leverage ratio and create a line graph of the leverage ratio over this sample (include the graph you created as part of your submission). Given the path of bank leverage since 2004, what can you conclude about moral hazard in the banking system over that time period? * - Just to show how nebulous is the definition of the leverage ratio, the inverse of this ratio is also called a leverage ratio in other contexts.
Microeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter8: Costs And The Supply Of Goods
Section: Chapter Questions
Problem 4CQ
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Transcribed Image Text:Bank capital is important since it constrains bank owners (and their agents, the bank managers) from engaging in risky lending at the depositors and FDIC
expense, i.e. moral hazard. The idea being that the more the owners of the bank have contributed to the bank's operation, the more they have to lose in
the face of a liquidation.
A leverage ratio is any one of several financial measurements that look at how much capital a firm holds in relation to its total assets. For our purposes
we define the bank's leverage ratio as equity capital divided by total assets.*
Go to the St. Louis Federal Reserve FRED database, and find data on assets less liabilities, i.e. bank capital (RALACBM027SBOG), and total assets of
commercial banks(TLAACBM027SBOG). Starting in January 1973 until December 2020, using the FRED web-based graphing tool (not the Excel add-on),
calculate the bank leverage ratio and create a line graph of the leverage ratio over this sample (include the graph you created as part of your submission).
Given the path of bank leverage since 2004, what can you conclude about moral hazard in the banking system over that time period?
* - Just to show how nebulous is the definition of the leverage ratio, the inverse of this ratio is also called a leverage ratio in other contexts.
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