What happens to the Net Worth of a bank when the value of its assets falls relat
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Question
What happens to the Net Worth of a bank when the value of its assets falls relative to the value of its liabilities? Will the bankers have to adjust assets if the value of the bank's liabilities begins to steeply decline? Why and How?What happens to the Net Worth of a bank when the value of its assets falls relative to the value of its liabilities? Will the bankers have to adjust assets if the value of the bank's liabilities begins to steeply decline? Why and How?
What happens to the Net Worth of a bank when the value of its assets falls relative to the value of its liabilities? Will the bankers have to adjust assets if the value of the bank's liabilities begins to steeply decline? Why and How?
What happens to the Net Worth of a bank when the value of its assets falls relative to the value of its liabilities? Will the bankers have to adjust assets if the value of the bank's liabilities begins to steeply decline? Why and How?
Explanation / Answer
Net worth usually determines how much value a particular organization. It is nothing but excess of assets over liabilities.
The net worth of a bank or any organization gets depleted because of annual operating losses or substantive reduction in asset values relative to its liabilities.
The banks will have to adjust the assets. This is because if the assets are not in excess of the liabilities, the net worth either becomes negative or keeps depleting which is not a good sign for the banks.
The assets of the banks can be adjusted by selling the securities in the secondary through which it can increase its cash, the banks can sell the leans such as credit card, mortgages, and auto loan receivables etc. to be securitized to asset backed securities which in turn are sold to the investors. This helps the banks to get more loans & also earn origination fees, service fees etc. on the loans. All this will help in increasing the assets of the bank, which in turn will increase its net worth.
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