Which of the following would decrease the leverage

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5. Which of the following would decrease the leverage ratio of a bank? (i) Households increase deposits in a bank, and the bank keeps the money in its vault (ii) Households increase deposits in a bank, and the bank loans out the this money HINT: consider what happens to assets and liabilities When households increase deposits in banks, bank liabilities increase. The cash in the vault becomes a bank asset. The loans the bank makes become an asset (money owed to them). Therefore both (i) and (ii) will increase assets and liabilities by the same amount. This is called increasing the balance sheet which results in an increase in the leverage ratio. See class notes for a numerical example of how the LR changes when there is an increase/decrease in assets and liabilities by the same amount.
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