Question
Which of the following statements about a bank's balance sheet is true?
a. An increase in a bank's capital increases its leverage ratio.
b. Assets minus liabilities equals owner's equity or capital.
c. The largest liability on the bank's balance sheet is its loans.
d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital.
e. None of the above is correct.
a. An increase in a bank's capital increases its leverage ratio.
b. Assets minus liabilities equals owner's equity or capital.
c. The largest liability on the bank's balance sheet is its loans.
d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital.
e. None of the above is correct.
Answers
GPT-4o mini
The correct statement about a bank's balance sheet is:
**b. Assets minus liabilities equals owner's equity or capital.**
To explain the incorrect options:
- **a. An increase in a bank's capital increases its leverage ratio.** (False: An increase in capital actually decreases the leverage ratio, as the leverage ratio is calculated by dividing total assets by total capital.)
- **c. The largest liability on the bank's balance sheet is its loans.** (False: The largest liability is typically deposits, not loans.)
- **d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital.** (False: A large change in the value of assets can significantly impact capital due to high leverage.)
Thus, option **b** is the only correct statement.
**b. Assets minus liabilities equals owner's equity or capital.**
To explain the incorrect options:
- **a. An increase in a bank's capital increases its leverage ratio.** (False: An increase in capital actually decreases the leverage ratio, as the leverage ratio is calculated by dividing total assets by total capital.)
- **c. The largest liability on the bank's balance sheet is its loans.** (False: The largest liability is typically deposits, not loans.)
- **d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital.** (False: A large change in the value of assets can significantly impact capital due to high leverage.)
Thus, option **b** is the only correct statement.