Question

on international financial crises.
5. What is the importance of bank capital and how does it enter the equity multiplier? Explain whether banks are safer (less likely to go bust) the higher or the lower is the equity multiplier.

Answer 1

Bank capital is difference between bank's assets and liabilities and it generally represent the net worth of the bank and its value to the investors. It is very important because its value need to be high so that bank will be solvent.

Equity Multiplier is the ratio of total bank asset to total shareholder's equity. So the bank capital is the denominator in equity multiplier. It is safer for bankto have low equity multiplier because in that way the value of bank capital will be high which shows that bank has good amount of capital to face any crisis situation.