Deck 31: Appendix: Capital and Leverage

Question 1

Just as greater leverage multiplies a bank's potential profits,it also multiplies a bank's potential losses.

Answer 1

True

Question 2

Given the balance sheet below,what is the simple leverage ratio?

A) 1.25
B) 0.25
C) 5.00
D) 4.00
E) 1.00

Answer 2

5.00

Question 3

In the aftermath of the 2008 financial crisis,everyone agreed that lower leverage ratios would be a good thing.

Answer 3

True

Question 4

Deleveraging is the process of reducing leverage,and therefore increasing the risk to capital from any further declines in asset prices.

Question 5

One way to decrease leverage is increasing capital.

Question 6

Deleveraging is the process of reducing leverage,and therefore reducing the risk to capital from any further declines in asset prices.

Question 7

The simple leverage ratio is defined as:

A) Depreciation of an asset / Value of an asset
B) Current assets / current liabilities.
C) Equity of an asset / Value of an asset
D) Value of an asset / Equity of an asset.
E) Equity of an asset / Original cost of an asset.

Question 8

A financial institution's leverage ratio is defined as:

A) Profit / Revenue.
B) Total Assets / Shareholders' Equity.
C) Shareholders' Equity / Total Assets.
D) Value of Delinquent Loans / Value of All Loans.
E) Total Debt / Total Revenue.

Question 9

It is easy for one financial institution to reduce its leverage by acting alone,but when many financial institutions try to do the same thing at once,asset prices fall rapidly and bank capital declines for all such institutions.

Question 10

It was the rapid and system-wide deleveraging that contributed to the downward spiral of the 2008 financial crisis.