Reducing equity increasing leverage increases roe

This preview shows page 1 - 4 out of 4 pages.

Reducing equity- increasing leverage, increases ROE Leverage requirement is based on total assets (unweighted sum of al balance sheet assets- off balance sheet items do not count)
Image of page 1

Subscribe to view the full document.

This is Tier 1 capital (book value of stock plus retained earnings) Assets= $420m Requirement is .04 So, (.04) (420m) = $16.8m BIS= (0 x 10m) + (20m x .2) + (0 x 190m) + (1 x 200m) = 204m (.04) (204m) = $8,160,000; 8.16m in Tier 1 capital Whole point of capital requirements was to push banks towards safer assets You do whichever (between leverage and BIS) is more stringent. In this case, it would be leverage requirement which must be followed b. There is a $40million loss on Mountain National’s loans. Who bears this loss? (Assume that all the bank’s deposits are insured and that the bank is liquidated in a payout) B. Read “Continental Bank Is Seeking to Switch…” (19.5), “U.S. Seeks To Loosen Bank Rules” (19.6) and “Evaluating the Centralized-Layers Approach To Us Federal Financial Regulation” (19.3) and answer the following questions: i. Why do you think Continental was seeking to switch regulators? What are the reasons suggested in the article? Which do you believe? Wanted to become regulated by the Federal reserve as opposed to the OCC (Office of the Comptroller of the Currency) Believes it can save $1 million to $2 million in examination fees, it was a cost saving mood Move also reflects the banks recent clashes over reserve levels Fed is a more consistent regulator ii. What were the changes the OCC subsequently proposed? iii. Why do you think the OCC proposed them? What are the reasons suggested in the article? Which do you believe? iv. What light does all this shed on the question of whether regulatory centralization is a good or bad thing? What are the arguments for and against? C. Read “Free Lunch for Now” (Item 19.4) and answer the following: i. What is the justification for imposing capital standards on banks? Why not rely on market discipline?
Image of page 2
ii. How did the Basel capital standards alter bankers’ incentives? How did banks respond?
Image of page 3

Subscribe to view the full document.

Image of page 4
  • Fall '19
  • Federal Reserve System, FDIC

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes