Suppose that a bank has a rate of return on equity capital of 12 percent and its retention ratio is 35 percent. How fast can this bank’s assets grow without reducing its current ratio of capital to assets? Suppose that the bank’s earnings (measured by ROE) drop unexpectedly to only two-thirds of the expected 12 percent figure. What would happen to the bank’s ICGR?
Question 15.20: Suppose that a bank has a rate of return on equity capital o...
The relevant formula is:
\text { ICGR }=\text { ROE } \times \text { Retention Ratio }
= 0.12 * 0.35
= 0.042 or 4.2 percent
If ROE unexpectedly drops to only two-thirds of the expected 12 percent figure, the ICGR becomes:
ICGR = [0.12 * 0.66] * 0.35
= 0.028 or 2.8 percent.
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