Consider the following balance sheets of two banks. These two banks have equal amounts of assets but are leveraged differently. Assume that there is no regulatory capital requirement. Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): $95,000 Capital (Net worth): $5,000 Total: $100,000 Total: $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? O Medes Bank O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by , and Medes Bank's capital increases by Therefore, if the value of assets is rising and liabilities do not change, a higher ratio results in a percentage increase in capital. 80% 20% ose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. 100% k's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): $80,000 Capital (Net worth): $20,000 Total: $100,000 Total: $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? O Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage in capital. 400% Now suppose all the items in the balance sheets of bd 300% return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Me k's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. 20% Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items greater ance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and th smaller le of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? O Medes Bank O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: : $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $95,000 $5,000 $100,000 $ Which bank has a lower leverage ratio? O Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by , and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by Therefore, if the value of assets is falling, a higher leverage ratio means a pentage decrease in capital. 25% Under this second scenario, which 5% 5% s closer to insolvency? O Medes Bank 20% O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by .. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by ., and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. 100% Under this second scenario, which bank is closer to insolvency? 75% Medes Bank 5% O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? O Arch Bank Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by ., and Medes Bank's capital increases by .. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by ., and Medes Bank's capital decreases by .. Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scen greater bank is closer to insolvency? smaller Medes Bank Arch Bank Consider the following balance sheets of two banks. These two banks have equal amounts of assets but are leveraged differently. Assume that there is no regulatory capital requirement. Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): $95,000 Capital (Net worth): $5,000 Total: $100,000 Total: $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? O Medes Bank O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by , and Medes Bank's capital increases by Therefore, if the value of assets is rising and liabilities do not change, a higher ratio results in a percentage increase in capital. 80% 20% ose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. 100% k's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): $80,000 Capital (Net worth): $20,000 Total: $100,000 Total: $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? O Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage in capital. 400% Now suppose all the items in the balance sheets of bd 300% return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Me k's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. 20% Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items greater ance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and th smaller le of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scenario, which bank is closer to insolvency? O Medes Bank O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: : $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: : $100,000 Total: $95,000 $5,000 $100,000 $ Which bank has a lower leverage ratio? O Arch Bank O Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by , and Medes Bank's capital increases by . Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by , and Medes Bank's capital decreases by Therefore, if the value of assets is falling, a higher leverage ratio means a pentage decrease in capital. 25% Under this second scenario, which 5% 5% s closer to insolvency? O Medes Bank 20% O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? Arch Bank Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by and Medes Bank's capital increases by .. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by ., and Medes Bank's capital decreases by . Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. 100% Under this second scenario, which bank is closer to insolvency? 75% Medes Bank 5% O Arch Bank Balance Sheet of Arch Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $80,000 $20,000 $100,000 Balance Sheet of Medes Bank Assets Liabilities Outstanding Loans: $100,000 Deposits (Liabilities): Capital (Net worth): Total: $100,000 Total: $95,000 $5,000 $100,000 Which bank has a lower leverage ratio? O Arch Bank Medes Bank Suppose both banks' assets increase by 20% to $120,000. Assume that the liabilities of both banks remain the same. Arch Bank's capital increases by ., and Medes Bank's capital increases by .. Therefore, if the value of assets is rising and liabilities do not change, a higher leverage ratio results in a percentage increase in capital. Now suppose all the items in the balance sheets of both banks return to their initial values. Suddenly, banks realize that loans they made are riskier than they thought, and the total value of their assets declines by 5% to $95,000. Again, assume that the liabilities of both banks remain the same. Arch Bank's capital decreases by ., and Medes Bank's capital decreases by .. Therefore, if the value of assets is falling, a higher leverage ratio means a percentage decrease in capital. Under this second scen greater bank is closer to insolvency? smaller Medes Bank Arch Bank
