Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy,but higher bank capital ________ the return on equity for a given return on assets.

Question

Quizplus · Accepted Answer

Higher bank capital reduces the likelihood of bankruptcy because it means the bank has more funds to cover losses. However, it also reduces the return on equity (ROE) for a given return on assets (ROA) because the equity base is larger, spreading the return over a larger amount of capital.

Bank Capital Has Both Benefits and Costs for the Bank