Example of How a Small Drop in Asset Value Can Wipe Out a Highly Leveraged Bank's Net Worth
To illustrate the risk of high leverage, consider a bank with 95% leverage, meaning its net worth constitutes only 5% of its total assets. In this scenario, a mere 5% decrease in the value of its assets is sufficient to completely eliminate the bank's net worth, rendering it insolvent.
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A financial institution has total assets valued at $200 million and total liabilities of $190 million. If the value of its assets unexpectedly decreases by 3%, its net worth will decrease by ____%. (Enter a number only)
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Three commercial banks have the following balance sheets:
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- Bank Beta: Total Assets = $200 million; Total Liabilities = $195 million
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