ECON 161A Lecture Notes - Lecture 9: Foreign Exchange Market, Freddie Mac, Tranche
Document Summary
How do banks manage assets: taking into account that size of the institution, the roa (in terms of dollar per assets) finds the profits of the bank. Em is the ratio of bank assets to equity capital; so the equation says something about the return after taxes per dollar. Roe is decreasing with the more capital that a bank holds. The more shareholders or claim to capital, the roe goes down. Lower roe (the bank management, if they come up with a way to increase capital, it makes shareholders worse off in a sense because they get less return on a dollar that they invested) The recession was caused partially because banks became insolvent due to there lack of capital, they did not have a buffer. Once we see that one bank has failed, people panic and pull out money so other banks have to sell assets to raise capital and shit hits the fan.
