ch19 - FIN 3303 Chapter 19 Bank Management The trade-off...

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FIN 3303 Chapter 19 Bank Management The trade-off between safety and profitability As risk increases, expected profitability increases. As risk decreases, expected profitability decreases. How to calculate the capital-to-asset ratio Total capital/total assets. Average capital ratio is 8%. Why is bank capital so important? Promotes confidence in the banking system. Provides protection to uninsured depositors and creditors. Serves as a base to raise deposits. Absorbs losses on assets (loans). The more risky the bank’s assets, the more capital the bank is required to hold; this ensures that depositors are adequately protected from potential losses. When is a bank solvent? A bank is solvent when it has more assets than liabilities. When is a bank insolvent? A bank becomes insolvent when it holds more liabilities than assets (when capital becomes negative). The impact of writing off a bad loan on the bank’s capital
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ch19 - FIN 3303 Chapter 19 Bank Management The trade-off...

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