8. Evaluation of a banks return on equity (ROE)

Which of the following are the bank decisions affecting financial characteristics and a banks return on equity (ROE)? Check all that apply.

Capital structure decision

Same decisions as for a banks return on assets (ROA) except overhead requirements and advertising

Only loan and deposit rate decisions

Same decisions as for a banks return on assets (ROA)

Which of the following formulas converts a banks return on assets (ROA) into a banks return on equity (ROE)?

ROE=ROA(Leverage measure)ROE=ROA(Leverage measure)

ROE=ROALeverage measureROE=ROALeverage measure

ROE=ROALeverage measureROE=ROALeverage measure

ROE=ROA+Leverage measureROE=ROA+Leverage measure

Complete the following statement about converting a banks return on assets (ROA) into a banks return on equity (ROE).

For a given positive level of ROA, a banks ROE will be if it has a capital ratio and financial leverage. This relationship explains why managers of banks prefer to use a degree of financial leverage.