Question

If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation? Make sure in your answer to compare and contrast the three tools that it has available and defend the one that you would use and why.

Answer 1

When a bank is falling short of meeting its capital requirements by $1 million, it can rectify the situation by issuing new shares, increasing profits, or reducing lending. While all three options have their merits, focusing on increasing profits is recommended for long-term financial health.

Step-by-step explanation:

When a bank is falling short of meeting its capital requirements by $1 million, there are three main tools it can use to rectify the situation:

1. Issue new shares: The bank can raise capital by issuing new shares of stock. This would involve selling ownership stakes in the bank to new investors, who would provide the bank with the necessary funds.
2. Increase profits: The bank can also try to increase its profits by implementing cost-cutting measures or finding new revenue streams. By generating more income, the bank can improve its capital position.
3. Reduce lending: Another option is for the bank to reduce its lending activities. This could involve calling in existing loans, tightening lending standards, or simply decreasing the overall amount of loans issued. By reducing its lending, the bank can decrease the amount of capital required.

Out of these three options, I would recommend the bank to first try to increase its profits. By focusing on improving its profitability, the bank can not only meet its capital requirements but also strengthen its overall financial health in the long run.