FRM Part I · FRM Exam Part I · Banks
A commercial bank's balance sheet shows total assets of USD 500 million, of which USD 20 million is cash and USD 480 million is loans and securities. Its liabilities consist of USD 440 million of deposits and USD 25 million of other borrowing. What is the bank's equity capital, and what is its leverage ratio expressed as assets divided by equity?
Equity is assets minus total liabilities: 500 minus (440 plus 25) equals USD 35 million. Leverage as assets divided by equity is 500/35, about 14.3 times. Omitting the USD 25 million of other borrowing would wrongly overstate equity at USD 60 million.
- AUSD 35 million; 14.3 timesCorrect
- BUSD 60 million; 8.3 times
- CUSD 35 million; 12.5 times
- DUSD 25 million; 20.0 times
Explanation
Liabilities are 440 + 25 = 465. Equity = 500 - 465 = 35. Leverage = 500 / 35 = 14.29 times. Using only deposits as liabilities gives equity of 60 and 8.3 times, which ignores the other borrowing.
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