If two banks A and B have the same positive ROA, but Bank B has higher financial leverage (i.e. a lower equity to asset ratio), Bank A will have a higher ROE than Bank

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Quizplus · Accepted Answer

Higher financial leverage (lower equity to asset ratio) means that Bank B is using more debt relative to its equity. Given the same positive ROA for both banks, the one with higher leverage (Bank B) would typically have a higher ROE because it is earning more on borrowed money. ROE is amplified by higher leverage as long as ROA remains positive and exceeds the cost of debt.

If Two Banks a and B Have the Same Positive