Financial Management Decision-Making At a Community Bank: A Case Study of Two Banks

Abstract

The effective use of financial leverage is fundamental to sound financial management, and no industry exemplifies leverage s importance more than banking. Commercial banks typically have returns on assets (ROA) in the range of one to two percent and sometimes less, and they use equity multipliers of five to 20 times to leverage that modest return into returns on equity (ROE) of around 15 percent. But suppose a bank is over-leveraged or under-leveraged? How does that affect the stockholders’ rate of return? What can a bank do to adjust its leverage position? This case study examines two banks with leverage positions that are polar extremes. The effect on the banks’ fundamentals is examined and corrective measures are proposed.

Journal Information

The Journal of Financial Education, published quarterly, is devoted to promoting financial education through publication of articles that focus on: 1) Educational research 2) Creative pedagogy 3) Curriculum development We seek articles that help improve the delivery of financial education through research that tests hypotheses regarding all aspects of the educational process, pedagogical papers that offer interesting or unique approaches to teaching, case studies, and literature reviews. All papers go through a double-blind reviewing process.