Bill:
> The assets would be the $1 million, but what are the liabilities? Would it
> be my
> ownership stake, i.e., shares of the company that I own?
Yes! There is no Debt so Assets = Share Holders' Equity. It goes like this:
Assets Liabilities
____________________________
Cash ($1 M) Debt ($0 M)
Equity ($1 M)
If you had $1 M and borrowed $1 M, then your T account would have looked:
Assets Liabilities
____________________________
Cash ($2 M) Debt ($1 M)
Equity ($1 M)
In the former, there is no leverage or your leverage ratio is just 1.
In the latter, there is leverage and your leverage ratio is 2.
Presumably, a "healthy" bank should have a leverage ratio of 8 to 10,
and don't ask me why. This is what they claim. Assuming that 10 is the
best, the T account of a "healthy" bank may look like this:
Assets Liabilities
____________________________
Cash ($10 M) Debt ($9 M)
Equity ($1 M)
In the above, the leverage ratio is 10. After that, things get very
complicated, of course. The above is just the beginning.
Don't forget: in these T accounts, the left is always equal to the right.
Some weird western thinking it must be!
Best,
Sabri
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