What should be the impact on a bank's return on assets and return on equity from increased use of off-balance-sheet activities?
What will be an ideal response?
Since off-balance-sheet activities generate income but do not add to assets or liabilities, the impact should be to increase the return on assets. Since ROA is calculated by dividing net income after taxes by total assets, only the numerator is increasing, not the denominator, so ROA should increase. The same thing could be said about return on equity (ROE); the net return after taxes increases, but the bank's capital does not, so ROE increases. This is the main reason banks are increasing their use of off-balance-sheet activities.
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A) guitars B) cellos C) both goods D) neither good
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