1. Using the balance sheet and profit and loss account data, apply the ROE decomposition. Calculate the equity multiplier or leverage of the bank. Calculate the return on assets (using after tax income). Use the two observations to calculate return on equity (using after tax income). Then, calculate ROE using the profit and loss account data. Are the two estimates of ROE the same? Assume the bank becomes more highly levered and the equity multiplier is 30 while ROA remains the same. What is the level of ROE? Assume the banks becomes less levered and the equity multiplier is 10 and ROA remains constant. What is the level of ROE?

Assets, m	2006	Liabilities, m	2006
Gross loans	470,828	Deposits & short-term funding:	558,322
Impaired/nonperforming loans	3,935	Customer deposits	384,222
Net loans	466,893	Interbank deposits	132,143
Other earning assets:	350,418	Other deposits & ST funds	41,957
Interbank loans	82,606	Other interest-bearing liabilities:	239,248
Derivatives	116,681	Derivatives	118,112
Other securities	146,246	Trading	49,476
Total earning assets	817,311	Long term funds	71,660
Non-earning assets	40,586	Noninterest bearing liabilities	26,380
Fixed assets	13,535	Equity	45,490
Total assets	871,432	Total liabilities & equity	871,432
Liquid assets		201,047
Off-balance-sheet items		264,903

Profit and Loss Account, m	2006
Interest received	24,688
Interest expense	14,092
Net interest revenue	10,596
Noninterest income	12,948
Gross income	23,544
Net interest expense (overhead cost)	12,481
Personnel expense	6,723
Other operating expense	5,758
Loan loss provisions	1,877
Profit before tax	9,186
Tax	2,689
Net income	6,497

Please complete the table

	ROE (%)	Equity Multiplier	ROA (%)
Banks