How do capital requirements constrain bank growth?
A) By discouraging investments in Treasury securities.
B) By disallowing the ownership of mortgage loans.
C) By decreasing a bank's net interest margin.
D) By limiting the amount of new assets that a bank can acquire through debt financing.
E) By reducing a bank's CAMELS ratings.

Question

Quizplus · Accepted Answer

Capital requirements limit the amount of new assets a bank can acquire through debt financing. This means that banks cannot grow too quickly through acquisition of new assets without increasing their capital base. This constrains their growth potential as they have to rely on alternative forms of financing, such as equity financing, which may be more expensive.

How Do Capital Requirements Constrain Bank Growth