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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
- 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 |
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