Question

Which one of the following statement is not the reason why bank leverage is high?

(a) Convenience yield: people like to hold bank deposits as means of payment
(b) Government guarantee: when banks face distress, government bails out banks
(c) Informational advantage: through client relationships, banks identify good projects to lend to
(d) Stable cash flow: by holding fixed income securities, banks' cash flow is stable

Answer 1

Bank leverage is not high due to banks' informational advantage in identifying good projects to lend to.

Step-by-step explanation:

The reason why bank leverage is high is not due to the informational advantage that banks have in identifying good projects to lend to. Bank leverage refers to the use of borrowed funds by banks to finance their operations and investments. The other three options mentioned in the question - convenience yield, government guarantee, and stable cash flow - all contribute to why bank leverage is high.