- Based on the information provided below about banks A and B, compute for each bank its return on assets
(ROA), return on equity (ROE) and leverage ratio.
a. Bank A has net profit after taxes of $1.8 million and the balance sheet below:
Bank A
(in millions)
Assets Liabilities
Reserves $5 Deposits $100
Loans $70 Borrowing $10
Securities $45 Bank Capital $10
b. Bank B has net profit after taxes of $0.9 million and the balance sheet below:
Bank B
(in millions)
Assets Liabilities
Reserves $7.5 Deposits $75.0
Loans $55.0 Borrowing $3.0
Securities $23.5 Bank Capital $8.0 - Explain how a bank uses liability management to respond to a deposit outflow. Why do banks prefer liability
management to asset management?
FRED QUESTIONS
- Are U.S. banks increasing in size? Use FRED to plot since 1984 on a quarterly basis the number of U.S.
commercial banks (FRED code: USNUM) and, on the right scale, the volume of their deposits (FRED code:
DPSACBM027SBOG). Download the data and compute the average deposit size of banks in the first quarters
of 1984 and 2016. - What share of U.S. banks fail? Plot since 2000 the fraction (in percent) of bank failures (FRED code:
BKFTTLA641N) relative to the number of banks (FRED code: USNUM). Comment on the timing and the
proportion of failures. Were most of the failing banks large or small?
Sample Solution
