Question

Explain why the ratio of assets to capital increased dramatically for commercial banks from the 1920s to the present.

Answer 1

The ratio of assets to capital was increased by commercial banks from 1920 onwards until present to prevent commercial banks from taking excess leverage and becoming insolvent in the process. The banks should be able to maintain high assets ratio during the depression of the an economy. If they don't maintain a certain numbers to maintain stability it can lead the bank to insolvency which can effect the economy. The banks needs to maintain credit supply. The ratio of assets to capital shows the bank's assets and its liabilities respectively, and it represents the net worth of the bank.

The ratio of assets of a banks shows how much assets that the banks own. The ratio of capital show the liabilities of the bank and what it would take to liquidate the assets.

Assets includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans).

The liabilities section of a bank's capital includes loans and any debt it owes.

It is a protection step taken by banks to safegaurd the bank depositors and the financial system as a whole. It acts as health indicator to the economy.

To have a better stability for commercial banks it is very neccessary that the ratio of assets must increase. It show the worth of the banks. It gains confidence of the banks to contribute to the economic development.