Chapter 10, Problem 2DAP

To determine

The leverage ratio for the banks with respect to the total assets and bank capital and to ascertain the moral hazards on the banks over the time.

Concept Introduction:

Leverage Ratio: Leverage ratio indicates the debts of a company against its several accounts. Bank capital is a part of debt.

Moral Hazards: Person would take the risk on a condition wherein the other person would suffer the consequences.

Explanation of Solution

Bank Leverage Ratio 1990

January			July
Bank Capital	206.2938		Bank Capital	216.4139
Total Assets	3151.4032		Total Assets	3254.435
Leverage Ratio	0.065461		Leverage Ratio	0.066498
February			August
Bank Capital	216.4620		Bank Capital	214.1683
Total Assets	3164.7700		Total Assets	3282.767
Leverage Ratio	0.068397		Leverage Ratio	0.06524
March			September
Bank Capital	211.8968		Bank Capital	219.6109
Total Assets	3184.0284		Total Assets	3279.031
Leverage Ratio	0.06655		Leverage Ratio	0.066974
April			October
Bank Capital	214.9664		Bank Capital	218.4562
Total Assets	3197.3688		Total Assets	3275.413
Leverage Ratio	0.067232		Leverage Ratio	0.066696
May			November
Bank Capital	213.0511		Bank Capital	216.9110
Total Assets	3205.8259		Total Assets	3279.432
Leverage Ratio	0.066457		Leverage Ratio	0.066143
June			December
Bank Capital	217.2948		Bank Capital	219.9433
Total Assets	3234.4319		Total Assets	3285.839
Leverage Ratio	0.067182		Leverage Ratio	0.066937

January	0.065461
February	0.068397
March	0.06655
April	0.067232
May	0.066457
June	0.067182
July	0.066498
August	0.06524
September	0.666974
October	0.66696
November	0.066143
December	0.066937

Bank Leverage Ratio 1990

The leverage ratio of the banks during the time period 1990 is indicated in the below graph.

Bank Leverage ratio 2018
January
Bank Capital	1852.716
Total Assets	16758.4
Leverage Ratio	0.110554
February
Bank Capital	1839.269
Total Assets	16729.74
Leverage Ratio	0.10994
March
Bank Capital	1850.533
Total Assets	16695.79
Leverage Ratio	0.110838
April
Bank Capital	1836.656
Total Assets	16621.14
Leverage Ratio	0.110501

January	0.110554
February	0.10994
March	0.110838
April	0.110501

Bank Leverage ratio 2018

The leverage ratio graph indicates that it has dropped during February and has increased during March. The values are fluctuating since the beginning of 2018.

Explanation: The calculations have been carried to identify the leverage ratios for every month during the period 1990 and 2018. From the calculations done for every month, it was identified that the leverage ratio for the commercial banks with respect to the capital and the assets during 1990 was around 0.06. It was identified that if the leverage ratio is high, the value of the bonds of the banks could be higher. On the other hand, if the leverage ratios are low, it shows that the capability of the financial institution to meet the obligation is low. Hence, it can be said that the commercial banks did not have much capacity in 1990 to repay its debts. In 2018, the leverage ratio had accounted to 0.1 average. This indicates that there is an improvement in the financial performance of the banks which has increased the capability to meet its both long term and the short term obligations.

The probability of depositors getting affected in investing in the banks with low ability to repay its credit could be higher. Therefore, Moral Hazard problems could be less for the customers of the US commercial banks in 2018 compared to 1990. The leverage ratio is much higher in 2018 compared to1990.