Class Notes (806,429)
Canada (492,247)
Brock University (11,827)
Economics (195)
ECON 3P03 (19)

Strategies for Managing Bank Capital.doc

2 Pages
Unlock Document

Brock University
Zisimos Koustas

Another relevant ratio is the equity multiplier: Total Aaaets EM = Equit_Capital The equity multipliers in our previous example are: High-capital bank: EM=100 / 10 = 10 Low-capital bank: EM=100 / 4 = 25 The three measures of bank performance are linked as follows: Net_Profit_(after_tax)s ROE = Equit_Capital Net_Profit_(after_ta)es Total Assets = x Total_Assets Equit_Capital ROE = ROAX EM The above formula demonstrates that there is a trade-off between safety (high capital) and ROE. Equity capita↑ EM ↓ ROE ↓ Suppose that both banks in our previous example are equally well run so that their ROAis the same at 1%. Their respective return on equity measures are: High capital bank: ROE = ROAx EM = 1x10=10% Low capital bank: ROE = ROAx EM = 1x25=25% (1) In times of economic uncertainty banks may need to boost their capital to guard against the possibility of loan losses and insolvency. This will reduce the EM and lower the return to the shareholders (ROE). Due to the relationship between equity capital and the risk of default, banks are subject to capital requirements imposed by regulatory authorities. Strategies for Managing Bank Capital Equity capital can be adjusted through the use of the following measures: ways of lowering the amount of capital (or raising the eq
More Less

Related notes for ECON 3P03

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.