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Consider the following statements regarding the leverage ratio for banks.
1. The leverage ratio measures a bank's core capital to its total assets.
2. An increase in the leverage ratio for banks helps them boost their lending activities.
Which of the above statements is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements regarding the leverage ratio for ba...
The Reserve Bank relaxed the leverage ratio (LR) for banks to boost their lending activities.
The leverage ratio stands reduced to 4 per cent for Domestic Systemically Important Banks (DSIBs) and 3.5 per cent for other banks effective from the quarter commencing October 1, 2019.
"Both the capital measure and the exposure measure, along with Leverage Ratio, are to be disclosed on a quarter-end basis. However, banks must meet the minimum Leverage Ratio requirement at all times," RBI said.
The leverage ratio is defined as the capital measure divided by the exposure measure, expressed as a percentage. The capital measure is tier 1 capital, and the exposure measure includes both on-balance sheet exposure and off-balance sheet items.
The leverage ratio measures a bank's core capital to its total assets. The ratio uses tier 1 capital to judge how leveraged a bank is in relation to its consolidated assets. Tier 1 assets are ones that can be easily liquidated if a bank needs capital in the event of a financial crisis. So, it is basically a ratio to measure a bank's financial health. The higher the tier 1 leverage ratio, the higher the bank's likelihood withstanding negative shocks to its balance sheet.
The leverage ratio is used as a tool by central monetary authorities to ensure banks' capital adequacy and place constraints on the degree to which a financial company can leverage its capital base.
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Consider the following statements regarding the leverage ratio for ba...
Explanation:
The leverage ratio is a measure of a bank's core capital to its total assets. It is calculated by dividing a bank's Tier 1 capital (core capital) by its total exposures (total assets). The leverage ratio is a key indicator of a bank's financial strength and stability.
Statement 1:
The first statement is correct. The leverage ratio measures a bank's core capital to its total assets. Core capital refers to a bank's Tier 1 capital, which includes common equity tier 1 capital and additional tier 1 capital. Total assets include all the assets held by the bank, such as loans, investments, and other holdings.
Statement 2:
The second statement is incorrect. An increase in the leverage ratio for banks does not necessarily help them boost their lending activities. The leverage ratio is primarily used as a measure of a bank's financial stability and risk. A higher leverage ratio indicates that a bank has a higher proportion of capital to its total assets, which can be seen as a positive sign of financial strength. However, it does not directly impact a bank's lending activities. The lending activities of a bank are influenced by factors such as market conditions, interest rates, and regulatory requirements, rather than the leverage ratio.
Therefore, only statement 1 is correct. The leverage ratio measures a bank's core capital to its total assets. An increase in the leverage ratio for banks does not necessarily help them boost their lending activities.
The leverage ratio is a measure of a bank's core capital to its total assets. It is calculated by dividing a bank's Tier 1 capital (core capital) by its total exposures (total assets). The leverage ratio is a key indicator of a bank's financial strength and stability.
Statement 1:
The first statement is correct. The leverage ratio measures a bank's core capital to its total assets. Core capital refers to a bank's Tier 1 capital, which includes common equity tier 1 capital and additional tier 1 capital. Total assets include all the assets held by the bank, such as loans, investments, and other holdings.
Statement 2:
The second statement is incorrect. An increase in the leverage ratio for banks does not necessarily help them boost their lending activities. The leverage ratio is primarily used as a measure of a bank's financial stability and risk. A higher leverage ratio indicates that a bank has a higher proportion of capital to its total assets, which can be seen as a positive sign of financial strength. However, it does not directly impact a bank's lending activities. The lending activities of a bank are influenced by factors such as market conditions, interest rates, and regulatory requirements, rather than the leverage ratio.
Therefore, only statement 1 is correct. The leverage ratio measures a bank's core capital to its total assets. An increase in the leverage ratio for banks does not necessarily help them boost their lending activities.
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Consider the following statements regarding the leverage ratio for banks.1. The leverage ratio measures a bank's core capital to its total assets.2. An increase in the leverage ratio for banks helps them boost their lending activities.Which of the above statements is/are correct?a) 1 onlyb) 2 onlyc) Both 1 and 2d) Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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