Question

If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?

Short answer

The bank should confirm that its ROE is relevant so that the bank can attract equity holders and improve the market value of shares.

Step-by-step solution

Concept introduction

The return on equity is a significant device to

measures a bank's performance

Step 2:Return On Equity 

The return on equity is a significant device to

measures a bank's performance. The bank continuously attempts to maintain a suitable level of ROE. Higher return on equity results in the investment of adequate funds in equity to enhance bank functions.

Step 3:Actions to improve ROE

Bank's too much capital influenced the level of ROE. Bank desires to improve the level of ROE. Bank can enhance its ROE via the use of the following actions:

• Declare constant dividends on equity.
• Buyback of equity shares.
• Keeps a consistent level of operating profits and net interest margin.
• Obtain loans and ensure to acquire sufficient capital structure.
• Effectively assets-liability management.
• Improve the number of productive assets.

Step 4:Final answer

The bank should confirm that its ROE is relevant so that the bank can attract equity holders and improve the market value of shares. Bank can use various strategies to make sure that its capital structure is satisfactory and the equity holders are not influenced due to too much capital.