Question

How would a bank’s ability to control its burden ratio impact its return on equity?

Answer 1

"Banks target ROE and make active use of leverage to effect the speed of adjustments towards ROE targets. As a result ROE targeting could affect leverage dynamic and amplify cyclical fluctuations as banks take on more leverage to achieve high returns when risk when risk premium are low, and rush for the exit and deliver to contain losses when cycle turns. Ex: Return on equity targeting is a common strategy in GBE bank industry and is usually publicized in bank strategy statements. Although ROE is considered to be a partial indicator of bank performance not taking into account any risk assessment, it is still broadly used in the form of a target often reaching unrealistic and unsustainable values. In a sense, ROE is more communication tool than a proper performance benchmark."