Which of the following statements about a bank's balance sheet is true?

Question

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.

Answer 1

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.