I was wondering when a bank's stock prices decrease, does this increase their leverage and decrease their capital? My thoughts are that the value of the Share Holder's equity used in calculating leverage ratios is not marked to market, so it does not impact the leverage of the banks directly. The solutions to question 6 on the 2010 midterm seem to imply that the leverage of a bank increases when the price of the shares go down. I understand that the cost for the bank to borrow money from other banks or the cost of financing their repos may increase. Please correct me if I have any misconceptions.
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"The solutions to question 6 on the 2010 midterm" - did you just copy paste the question from somewhere?
Honestly! Wtf
If equity prices are anticipating eventual writedowns, as an example among many, then yes, they are anticipating book equity erodes and debt to equity increases. More important is cash reserves, bank lines etc -- liquidity -- a subject completely ignored by finance courses.
If you take leverage as debt capital / equity capital then naturally as the share price falls leverage rises. Just because you have to wait until the next annual report or 10k to see an official leverage number doesn't mean leverage doesn't fluctuate between those points.
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