Question

If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

Short answer

If a bank doubles the payment of its capital and ROA remains stable, then ROE will drop in half. The three things that a bank can accomplish to correct the condition:

• By giving new stock, it can increase $\$1$million of capital.
• It can cut its dividend payments by $\$1$million, thereby raising its retained earnings by $\$1$million.
• The number of assets can be reduced. by that, the amount of the bank's capital will improve. then it can reach the capital requirements.

Step-by-step solution

Concept Introduction

ROE-The profit from value is a significant apparatus to measures bank's exhibition.

ROA-The term return on resources (ROA) implies a financial extent that shows how helpful an association is comparable to its finished resources.

The three things that a bank can accomplish

1) If a bank doubles the payment of its capital and ROA remains stable, Then ROE will drop in half.

2) If a bank loses brief of meeting its capital necessities by$\$1$a million. Then the three things that a bank can accomplish to correct the condition:

• By giving new stock, can increase $\$1$million of capital.
• It can cut its dividend payments by $\$1$million, thereby raising its retained earnings by $\$1$million.
• The number of assets can be reduced. by that, the amount of the bank's capital will improve. then it can reach the capital requirements.