Refer to Exhibit 12-4.If Bank XYZ's assets rise by 4 percent and its liabilities rise by 2 percent,by what percentage would its bank capital change compared to its original bank capital (i.e.compared to the value originally in blank (A)),ceteris paribus?

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Quizplus · Accepted Answer

Bank capital changes based on the difference in the percentage change between assets and liabilities, not on the absolute change in their values. If assets increase by 4% and liabilities by 2%, the equity or bank capital effectively absorbs the difference, leading to a relative increase. The percentage change in bank capital can be calculated using the formula for the percentage change in equity given by the change in assets minus the change in liabilities, divided by the original equity. Assuming the original assets and liabilities structure, the increase in assets enhances the equity more significantly than the increase in liabilities, leading to a 9.1% increase in bank capital, when considering the leverage effect and the original proportions of assets, liabilities, and equity.