Which of the following is true?
A)The M&M leverage indifference theorem applies to banks.
B)In the cross-section of banks, the value of the bank is increasing in its equity capital.
C)Capital is money that banks have to set aside, so it is unavailable for lending.
D)Increasing equity capital in banking will diminish shareholder value in banking by reducing the bank's return on equity ROE).

Question

Quizplus · Accepted Answer

The statement "In the cross-section of banks, the value of the bank is increasing in its equity capital" is true. This is because higher equity capital signals to investors and creditors that the bank is more financially stable and can absorb losses better. This can lead to lower borrowing costs and higher stock prices, ultimately increasing the value of the bank.

A) The M&M leverage indifference theorem does not necessarily apply to banks since they operate in a regulated environment and have restrictions on their leverage ratios. 
C) Capital is not necessarily unavailable for lending, as banks can still lend out a portion of their capital while keeping some in reserve to meet regulatory requirements. 
D) Increasing equity capital can actually increase shareholder value in banking by signaling financial stability and increasing the bank's overall value, potentially leading to higher stock prices and dividend payouts.

Which of the Following Is True