The presence of a large capital surplus in a bank well above regulatory ratios m

Question

The presence of a large capital surplus in a bank well above regulatory ratios may be causing:

a. The return on equity to be too low

b. The equity multiplier to be too low

c. The return on assets to be too low

d. All of the above answers

e. None of the above answers.

To raise the equity multiplier, you may opt for which of the following:

a. Reduce the amount of bank capital by buying back some of the bank’s stock

b. Reduce the amount of bank capital by paying higher dividends to stockholders,

thereby reducing the bank’s retained earnings

c. Keep bank capital constant but increase the bank’s assets by acquiring new funds, say

by issuing CDs and then increasing loans or purchasing more securities with these

funds

d. All of the above answers

e. None of the above answers.

Explanation / Answer

The presence of a large capital surplus in a bank well above regulatory ratios may be causing the return on assets to be too low. The assets are higher in the bank as there is large capital surplus return on assets will be low.

Return on equity will not matter and equity multiplier will increase as it is total assets/total equity.

Please post other question separately, thanks.

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