FRM Part I · FRM Exam Part I · Banks
A bank's balance sheet shows total assets of $500 million, customer deposits of $380 million, other borrowings of $70 million, and the remainder funded by equity. Which of the following correctly gives the bank's equity and its leverage ratio (assets divided by equity)?
Equity is the balancing item: $500m assets minus $380m deposits and $70m borrowings leaves $50m. Dividing assets of $500m by equity of $50m gives leverage of 10 times, meaning each dollar of equity supports ten dollars of assets.
- AEquity of $50 million; leverage of 10 timesCorrect
- BEquity of $120 million; leverage of 4.17 times
- CEquity of $50 million; leverage of 0.10 times
- DEquity of $70 million; leverage of 7.14 times
Explanation
Equity = 500 - 380 - 70 = $50 million. Leverage = 500/50 = 10 times. Option B treats only deposits as the non-equity funding (500-380=120). Option C inverts the ratio.
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