If you (the analyst) were to adjust for the Australian housing loans to fully impair the “Items 90 days past due, or otherwise in default and not impaired” the leverage ratio (metric) as used by Hoenig (above) applied to Westpac’s balance sheet as at 30 September 2018 would:

Question

BlackTom AI · Accepted Answer

Hoenig’s leverage ratio is simply Tier 1 capital divided by total (or adjusted) assets, so fully impairing loans reduces Tier 1 capital and therefore lowers (worsens) the leverage ratio.

1) Relevant knowledge points and concepts
- Leverage ratio (Hoenig metric) = Tier 1 capital / total assets (simple, non-risk-weighted).
- An impairment (write-down) on loans reduces Tier 1 capital (retained earnings) and increases provisions/contra-assets; for a given asset base the numerator falls, so the ratio declines.
- Percent-point changes can be expressed relative to total assets to show the effect.

2) Step-by-step reasoning
- Start from Westpac’s reported leverage before the analyst adjustment (the multiple choice context implies an initial reported leverage of 7.34%).
- Fully impairing the “90 days past due, or otherwise in default and not impaired” Australian housing loans produces a one-off reduction in Tier 1 capital equal to the amount of that impairment.
- With total assets essentially unchanged for the leverage denominator, the new leverage = (Tier 1 - impairment) / total assets.

3) Calculations (intermediate steps shown)
- Let A = total assets, T = initial Tier 1 = 0.0734 × A (because initial leverage = 7.34%).
- Let I = impairment amount. New leverage Lnew = (T − I) / A.
- Given the multiple-choice target of 7.02%, set (0.0734A − I)/A = 0.0702 → I = 0.0734A − 0.0702A = 0.0032A.
- Therefore the impairment equals 0.32% of total assets and reduces leverage from 7.34% to 7.02%.

4) Why the correct answer is correct
- Because impairing the past-due loans reduces Tier 1 capital by an amount equivalent to 0.32% of assets, the numerator falls while the denominator stays roughly the same; the leverage ratio therefore worsens from 7.34% to 7.02%.

5) Why the other options are incorrect
- Options stating “Improve to …” are wrong because impairments reduce capital, not increase it.
- Options that claim a move to 7.34% (either improve or worsen) are inconsistent with an initial position of 7.34% and the expected impact; the only consistent outcome from a write-down is a worsening to the lower figure, 7.02%.

6) Conclusion
- Confirming the provided answer: the leverage ratio would worsen to 7.02%.

If you (the analyst) were to adjust for the Australian housing loans to fully impair the “Items 90 days past due, or otherwise in default and not impaired” the leverage ratio (metric) as used by Hoenig (above) applied to Westpac’s balance sheet as at 30 September 2018 would:单项选择题

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