Question

A Bank has a capital of 1 million Dollars, Deposits of 5 million Dollars and a debt of 2 million dollars on the liability and owners’ equity side. On the Assets side, the bank has reserves of 2 million dollars, loans of 3 million dollars and securities of 3 million dollars.

Estimate the bank’s leverage ratio =_______________________. The leverage ratio means that for every dollar of capital that the bank owner has contributed, the bank has _$_______ of assets. Of the _$______ assets, $________ are financed with borrowed money either by taking in deposits or issuing debt.

Answer 1

Leverage ratio measures a banks core capital to its total assets. It helps in understanding how leveraged the bank in relations to its consolidated assets

Tier 1 Leverage Ratio = (Tier 1 Capital / Consoildated Assets) x 100

Tier 1 capital = common equity, retained earnings, reserves, plus some other instruments with discretionary dividend and no maturity

Tier 1 capital = 1 million dollars

Consoildated assets = Reserves + Loan + Securities

= 2 million dolars + 3 million dollars + 3 million dollars

= 8 million dollars

Tier 1 Leverage ratio = (1 / 8) x 100 = 12.50%

The leverage ratio means that for every dollar of capital that the bank owner has contributed, the bank has $ 12.50 of assets. Of the $ 100 assets, $ 87.50 are financed with borrowed money either by taking in deposits or issuing debt.