Suppose a bank has assets of $500 million and capital of $100 million. Its return on assets is -3%. What is its leverage ratio? What is its return on equity?

What will be an ideal response?

Its leverage ratio is bank capital/bank assets or $100 million/$500 million = 0.20. Its return on equity is its return on assets × bank assets/bank capital = -3% × (1/0,2 ) = -15%.