If a bank needs to raise the amount of capital relative to assets,a bank manager might choose to
A)buy back bank stock.
B)pay higher dividends.
C)reduce the bank's assets by making fewer loans.
D)sell securities the bank owns and put the funds into the reserve account.

Question

Quizplus · Accepted Answer

By reducing the bank's assets by making fewer loans, the bank's assets will decrease, which will ultimately increase the bank's capital relative to assets. Buying back bank stock or paying higher dividends may temporarily increase the bank's capital, but it does not address the underlying issue of the bank's capital to asset ratio. Selling securities and putting the funds into the reserve account will increase the bank's reserves, but it may not be the most efficient way to increase the bank's capital to asset ratio. Therefore, reducing the bank's assets by making fewer loans is the best choice.

If a Bank Needs to Raise the Amount of Capital