Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics)
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Chapter 10, Problem 2DAP
To determine

The leverage ratio for the banks with respect to the total assets and bank capital and to ascertain the moral hazards on the banks over the time.

Concept Introduction:

Leverage Ratio: Leverage ratio indicates the debts of a company against its several accounts. Bank capital is a part of debt.

Moral Hazards: Person would take the risk on a condition wherein the other person would suffer the consequences.

Expert Solution & Answer
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Explanation of Solution

Bank Leverage Ratio 1990

    JanuaryJuly
    Bank Capital206.2938Bank Capital216.4139
    Total Assets3151.4032Total Assets3254.435
    Leverage Ratio0.065461Leverage Ratio0.066498
    FebruaryAugust
    Bank Capital216.4620Bank Capital214.1683
    Total Assets3164.7700Total Assets3282.767
    Leverage Ratio0.068397Leverage Ratio0.06524
    MarchSeptember
    Bank Capital211.8968Bank Capital219.6109
    Total Assets3184.0284Total Assets3279.031
    Leverage Ratio0.06655Leverage Ratio0.066974
    AprilOctober
    Bank Capital214.9664Bank Capital218.4562
    Total Assets3197.3688Total Assets3275.413
    Leverage Ratio0.067232Leverage Ratio0.066696
    MayNovember
    Bank Capital213.0511Bank Capital216.9110
    Total Assets3205.8259Total Assets3279.432
    Leverage Ratio0.066457Leverage Ratio0.066143
    JuneDecember
    Bank Capital217.2948Bank Capital219.9433
    Total Assets3234.4319Total Assets3285.839
    Leverage Ratio0.067182Leverage Ratio0.066937
    January0.065461
    February0.068397
    March0.06655
    April0.067232
    May0.066457
    June0.067182
    July0.066498
    August0.06524
    September0.666974
    October0.66696
    November0.066143
    December0.066937

Bank Leverage Ratio 1990

The leverage ratio of the banks during the time period 1990 is indicated in the below graph.

Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics), Chapter 10, Problem 2DAP , additional homework tip  1

    Bank Leverage ratio 2018
    January
    Bank Capital1852.716
    Total Assets16758.4
    Leverage Ratio0.110554
    February
    Bank Capital1839.269
    Total Assets16729.74
    Leverage Ratio0.10994
    March
    Bank Capital1850.533
    Total Assets16695.79
    Leverage Ratio0.110838
    April
    Bank Capital1836.656
    Total Assets16621.14
    Leverage Ratio0.110501
    January0.110554
    February0.10994
    March0.110838
    April0.110501

Bank Leverage ratio 2018

The leverage ratio graph indicates that it has dropped during February and has increased during March. The values are fluctuating since the beginning of 2018.

Economics of Money, Banking and Financial Markets, The, Business School Edition (5th Edition) (What's New in Economics), Chapter 10, Problem 2DAP , additional homework tip  2

Explanation: The calculations have been carried to identify the leverage ratios for every month during the period 1990 and 2018. From the calculations done for every month, it was identified that the leverage ratio for the commercial banks with respect to the capital and the assets during 1990 was around 0.06. It was identified that if the leverage ratio is high, the value of the bonds of the banks could be higher. On the other hand, if the leverage ratios are low, it shows that the capability of the financial institution to meet the obligation is low. Hence, it can be said that the commercial banks did not have much capacity in 1990 to repay its debts. In 2018, the leverage ratio had accounted to 0.1 average. This indicates that there is an improvement in the financial performance of the banks which has increased the capability to meet its both long term and the short term obligations.

The probability of depositors getting affected in investing in the banks with low ability to repay its credit could be higher. Therefore, Moral Hazard problems could be less for the customers of the US commercial banks in 2018 compared to 1990. The leverage ratio is much higher in 2018 compared to1990.

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