PRACTICE PROBLEMS 1. Compute and compare ROA and ROE for the following banks: $1

Question

PRACTICE PROBLEMS 1. Compute and compare ROA and ROE for the following banks: $100 Deposit 5% Equity Loan 790 $70 S30 Total Assets $100 Bank B $100 Deposit 5% Equity Total Liabilities and Loan 790 $90 $10 $100 Bank C $100 Deposit 3.888% $90 $10 Total Liabilities and $100 Loan 7% Equity Total Assets $100 2. Derive and explain each component of the return on equity model? Regulators use the CAMELS system to analyze bank risk. What does CAMELS stand for and what financial ratios might best capture each factor? 3. What are the primary sources of risk that depository institution managers face? Describe how each risk type potentially affects performance. Provide one financial ratio to measure each type of risk and explain how to interpret high vs. low values. 4.

Explanation / Answer

As per chegg policy there is a need to solve only one question in case of more than one

Bank I Income Loan 100*7% 7 Expense Deposits 70*5% 3.5 Total Assets 100 ROA Net Income/TA (7-3.5)/100 3.50% ROE Net Income/Equity 3.5/30 11.67% Bank II Income Loan 100*7% 7 Expense Deposits 90*5% 4.5 Total Assets 100 ROA Net Income/TA (7-4.5)/100 2.50% ROE Net Income/Equity 2.5/10 25.00% Bank III Income Loan 100*7% 7 Expense Deposits 90*3.888% 3.499 Total Assets 100 ROA Net Income/TA (7-3.499)/100 3.50% ROE Net Income/Equity (7-3.499)/10 35.01% Bank I Bank II Bank III ROA 3.50% 2.50% 3.50% ROE 11.67% 25.00% 35.01% Bank II has the lowest ROA as compared to other two banks because this bank has high deposits with high rate ROE of Bank I is the lowest because this bank has low deposits and high equity

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