XYZ Bank has the following balance sheet (in $million): Loans 100 Securities 25

Question

XYZ Bank has the following balance sheet (in $million):

                  Loans     100

                  Securities              25

Inter-bank Lending            0

                  Cash/Reserves     10

-        -

Demand Deposits               110

Bonds                                        20

Equity                                        ?

Holding Company HC owns all the equity of XYZ Bank, which is its only asset. It issued a bond to buy XYZ Bank. HC’s leverage ratio is 5. What are owners’ equity in XYZ and in HC? What is XYZ’s leverage ratio?

Extra Credit: If bank regulators “look through” XYZ to HC, what is XYZ’s true leverage ratio? In other words, how much capital does XYZ really have?

Explanation / Answer

Total Asset of XYZ = Loans + Securities + Cash (or Reserves) = $(100+25+10) million = $135million

Total Liabilities of XYZ = Demand Deposits + Bonds =$(110+20)million =$130million

As, Assets= Liability + Owner's Equity

Therefore, Owner's Equity of XYZ = $ (135-130) million = $5 million

As, Leverage Ratio = Liability / Owner's Equity

Therefore, Leverage Ratio of XYZ =(130/5)   =26

Given, Owner's Equity of XYZ = Asset of HC

So, Asset of HC = $ 5 miilion

Therefore, Liability of HC + Owner's Equity of HC = $ 5 miilion

Given, Leverage ratio of HC = 5

So, weightage of Owner's Equity of HC =1/6

Therefore, Owner's Equity of HC = $ [5 x (1/6)] million =$0.83 million

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.