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Chapter 9: Q. 23 (page 264)

Axle Bank reported an ROE of 16% and an ROA of 1.32%. What is the equity multiplier? How well capitalized is this bank?

Short Answer

Expert verified

Equity Multiplier is12.12

Step by step solution

01

Concept Introduction

Return on equity (ROE) is the standard of a firm's net earnings divided by its shareholders' equity. ROE is a gauge of a company's profitability and how efficiently it develops those profits.

02

Explanation

ROE = ROA ×EM

0.16=0.0132×EM

EM = 12.12= asset/equity

03

Final answer

This is a well-capitalized bank because its equity asset ratio exceeds the minimum required level.

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Most popular questions from this chapter

Suppose you are the manager of a bank that has \(15million of fixed-rate assets, \)30million of rate-sensitive assets, \(25million of fixed-rate liabilities, and \)20million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5percentage points. What actions could you take to reduce the bank’s interest-rate risk?

Suppose your bank has the following balance sheet:

If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50million?

Suppose New Bank decides to invest \(273million in 30-day T-bills. The T-bills are currently trading at \)4,981 (including commissions) for a $4,940 face value instrument. How many T-bills do they purchase? What does the balance sheet look like?

Go to the St. Louis Federal Reserve FRED database, and find data for all commercial banks on total assets (TLAACBM027SBOG), U.S. government and agency securities held (USGSEC), other securities held (OTHSEC), commercial and industrial loans (BUSLOANS), real estate loans (REALLN), consumer loans (CONSUMER), interbank loans (IBLACBM027SBOG), other loans (OLLACBM027SBOG), and other assets (OATACBM027SBOG). Use the most recent month of data available across all indicators.

a. What is the total amount of loans held by banks? What is this number as a percentage of total bank assets?

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If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?
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