Question

QUESTION 11 You are the bank manager of a bank with 10m. capital and 90m. deposits. . Deposits cost you 1 % Choice of two assets: a safe asset earning 5% risk free b. Risky asset earning 25% and loses 20% with equal probabilities Calculate the expected ROA and ROE for both choices (Hint: Calculate the profits net of deposit interests for the good/ bad scenario first. Remember: For owners the loss is limited toequity) If the bank only holds the risk free asset, its ROA is If the bank only holds the risky asset, its ROA is To maximize share holder return the bank manager will chose the Would the depositors be happy with 1% interest if they knew what the banker is doing? The interest rate on deposits would % and the ROE is 96 and the ROE is (risk free or risky?) asset. (increase / decrease) if the depositors had perfect information about the bank's risk profile. Repeat your calculations for the case that the bank uses 30m capital and only 70m deposits. Investing in the risky asset would now have an expected ROA of 1%and ROE of Sit back and think of the importance of bank equity for the choices that bank managers will make. Which is better for society? Can you see why we need bank regulation?

Answer 1

From, the examples it can be understood that with higher equity proportion Banks tend to invest wisely, carefully and avoid reckless and risky investing. So, for the society higher Equity requirement for Banks is beneficial as it leads to stable Banking System.
3) To marintge Shaseholder etarbank oll chosse the A Anuvale sits 70m aprta Investment n isy aets Weighted Avg Teaan-2.5% 100 30