The ratio of equity to total assets is a measure of a bank's __________ risk.

Question

Quizplus · Accepted Answer

The ratio of equity to total assets is commonly known as the equity multiplier. It indicates the degree of leverage a bank is using to finance its assets. The higher the equity multiplier, the greater the level of financial leverage and, thus, the greater the risk for the bank's shareholders. Therefore, the ratio of equity to total assets is a measure of a bank's leverage risk.

The Ratio of Equity to Total Assets Is a Measure