When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.

Question

Quizplus · Accepted Answer

When a bank holds a lower level of capital, a given dollar level of profits represents a higher return on equity because return on equity is calculated as net income divided by shareholder equity, so less capital means the same profit is divided by a smaller number, resulting in a higher return on equity.

When a Bank Holds a Lower Level of Capital, a Given