Which bank has a higher leverage ratio?

Arch Bank

Medes Bank

Suppose both banks' assets increase by $20\%$ to $$120,000.$ Assume that the liabilities of both banks rentain the same. Arch Bank's capital increases by $,$ and Medes Bank's capital increases b$!-$ 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 iterns 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 b$),$ 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?

Medes Barik

Arch Bank