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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

A bank holds assets of ₹1,000 crore financed by ₹950 crore of liabilities and ₹50 crore of equity. Its assets fall in value by 4%. What is the bank's remaining equity, and what does this show about leverage?

Equity falls to ₹10 crore. A 4% fall in ₹1,000 crore of assets is a ₹40 crore loss, which comes out of the ₹50 crore equity. With leverage of 20 times, even a small asset decline destroys most of the capital, illustrating crisis vulnerability.

  1. A₹46 crore; leverage has no effect on losses
  2. B₹10 crore; a small fall in assets removes most of the equity because leverage is highCorrect
  3. C₹40 crore; losses are shared equally with depositors
  4. D₹0; the bank is insolvent at any fall in assets
  5. ₹50 crore; liabilities absorb the loss first

Explanation

A 4% fall equals ₹40 crore. Equity becomes 50 − 40 = ₹10 crore. Leverage is 20 times (1,000/50), so a 4% asset loss wipes out 80% of equity. The ₹46 crore option wrongly applies 4% to the equity only.

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