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2. Leverage and returns The following tables show the balance sheets of two banks: Wide Bank and Narrow Bank. Wide Bank Balance Sheet Assets Reserves Liabilities and Net Worth $150,000 Checking deposits $500,000 Loans outstanding $450,000 Stockholders' equity $100,000 Total $600,000 $600,000 Total Narrow Bank Balance Sheet Assets Liabilities and Net Worth Reserves $0 Checking deposits $0 Loans outstanding $200,000 Stockholders' equity $200,000 $200,000 Total $200,000 Total is a levered bank, while is an unlevered bank. Assume that both banks offer an annual rate of 3% on checking deposits and charge an annual rate of 5% on loans. For Narrow Bank, the annual interest cost on deposits is $ loans is $ , and the annual return on , which . Hence, Narrow Bank earns a net profit of $ represents a rate of return of equity. % (Hint: Round to 1 decimal place.) on stockholders' , and the annual return on For Wide Bank, the annual interest cost on deposits is $ loans is $ , which . Hence, Wide Bank earns a net profit of $ represents a rate of return of equity. % (Hint: Round to 1 decimal place.) on stockholders' Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for Wide Bank decreases from $450,000 to $ , which represents a loss of % (Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding for Narrow Bank decreases from $200,000 to $ of , which represents a loss % (Hint: Round to 1 decimal place.) of stockholders' equity. provides a higher rate of return to its investors, Therefore, and loans. ▾ exposes its investors to greater risk in the event of a decline in the value of
2. Leverage and returns The following tables show the balance sheets of two banks: Wide Bank and Narrow Bank. Wide Bank Balance Sheet Assets Reserves Liabilities and Net Worth $150,000 Checking deposits $500,000 Loans outstanding $450,000 Stockholders' equity $100,000 Total $600,000 $600,000 Total Narrow Bank Balance Sheet Assets Liabilities and Net Worth Reserves $0 Checking deposits $0 Loans outstanding $200,000 Stockholders' equity $200,000 $200,000 Total $200,000 Total is a levered bank, while is an unlevered bank. Assume that both banks offer an annual rate of 3% on checking deposits and charge an annual rate of 5% on loans. For Narrow Bank, the annual interest cost on deposits is $ loans is $ , and the annual return on , which . Hence, Narrow Bank earns a net profit of $ represents a rate of return of equity. % (Hint: Round to 1 decimal place.) on stockholders' , and the annual return on For Wide Bank, the annual interest cost on deposits is $ loans is $ , which . Hence, Wide Bank earns a net profit of $ represents a rate of return of equity. % (Hint: Round to 1 decimal place.) on stockholders' Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for Wide Bank decreases from $450,000 to $ , which represents a loss of % (Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding for Narrow Bank decreases from $200,000 to $ of , which represents a loss % (Hint: Round to 1 decimal place.) of stockholders' equity. provides a higher rate of return to its investors, Therefore, and loans. ▾ exposes its investors to greater risk in the event of a decline in the value of
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