Question

Suppose owners of a bank would like to reduce the amount of capital relative to assets....

Suppose owners of a bank would like to reduce the amount of capital relative to assets. This could be accomplished by:

a. all of these

b. distributing dividends to shareholders

c. borrowing funds and making more loans

d. buying back shares from existing owners

Business   Economics   
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Homework Answers

Answer #1

Option A.

  • If the banks wish to reduce the amount of capital, then it means that it has more capital than the assets they hold.
  • This will make the bank have more liabilities associated with the capital than the assets.
  • Hence if it wishes to reduce the amount of capital, it can distribute the dividends to other shareholders, borrow funds in return of capital, buying back the existing shares from shares will increase the assets as the cash holdings of bank rise.
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