Question

Why is it difficult, and sometimes controversial, to decide on a bank's net worth? Why can't bank employees see the balance sheet of the bank and make a determination of worth?

Answer 1

All banks are engaged in commercial activities meaning that their basic activities involves granting loans to others and take various form of deposits such as time and demand liabilities.from the homeowners which are their biggest customers who take these services.

While calculating the worth it is more important to look at various factors such as the ability to service debt,the value of various collateral,the debt-equity ratio and the ratings which overall determines the worth and which is not possible to know by just looking at the balance sheet as these tools are there to give the real picture instead of just a positve number.

The homeowners also carry the highest credit risk and also the lowest net wealth so while determining worth,the balance sheet will not reflect the true state of the credit risk that the customers carry as it will progressively make the balance sheet worse.