If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A. sell securities the bank owns and put the funds into the reserve account. B. pay higher dividends. C. borrow more reserve from the Central Bank. D. issue more shares.
Question
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A. sell securities the bank owns and put the funds into the reserve account. B. pay higher dividends. C. borrow more reserve from the Central Bank. D. issue more shares.
Solution
The bank manager might choose to issue more shares (Option D). Here's why:
A. Selling securities the bank owns and putting the funds into the reserve account would not raise the amount of capital relative to assets. It would just shift funds from one type of asset (securities) to another (reserves).
B. Paying higher dividends would actually decrease the amount of capital relative to assets, as dividends are paid out of a company's profits or reserves, reducing the amount of capital the bank has.
C. Borrowing more reserve from the Central Bank would increase the bank's liabilities, not its capital. This would not help in raising the amount of capital relative to assets.
D. Issuing more shares would raise additional capital for the bank. The money received from selling new shares increases the bank's capital without increasing its assets, thus raising the amount of capital relative to assets.
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