Business-7789060

Business-7789060 - A bank with a leverage of 60 feels that...

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Question: 1. Why do banks (depositories) have such high ratios of debt to assets (heavy use of financial or debt leverage)? Solution: The banks have high ratios of debt to assets because they can borrow at a relatively lower rate and extend loans (develop lucrative assets) with relatively low risks. The difference between the borrowing rate and the lending rate represents the profit. In Europe most banks report a leverage ratio of close to 10, however, Barclays has a leverage ratio of 60!
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Unformatted text preview: A bank with a leverage of 60 feels that it can earn six times the bank that is leveraged 10 times. In case of companies, the company must have a cash flow to repay the debt and interest. In case of banks, they have confidence that they will be able to service their debt from the stream of cash received from depositors. In short it is the need for making a fast buck that is prompting banks to have high leverage ratios. Reference: http://www.economicshelp.org...
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This note was uploaded on 02/21/2012 for the course ACT 492 taught by Professor Ngo during the Fall '11 term at Colorado.

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