Question6.1 Applying the same leverage ratio used by Hoenig (above) to Deutsche Bank’s Balance Sheet as at 31 December 2015:(2 marks) None of the options listed. The equity buffer has more than doubled since 2012. The liquidity risk of Deutsche Bank has not improved since 2012. The solvency risk of Deutsche Bank has not improved since 2012. ResetMaximum marks: 2 Flag question undefinedSingle choice
A
None of the options listed.
B
The equity buffer has more than doubled since 2012.
C
The liquidity risk of Deutsche Bank has not improved since 2012.
D
The solvency risk of Deutsche Bank has not improved since 2012.

Question

Question6.1 Applying the same leverage ratio used by Hoenig (above) to Deutsche Bank’s Balance Sheet as at 31 December 2015:(2 marks) None of the options listed. The equity buffer has more than doubled since 2012. The liquidity risk of Deutsche Bank has not improved since 2012. The solvency risk of Deutsche Bank has not improved since 2012. ResetMaximum marks: 2 Flag question undefinedSingle choice

A

None of the options listed.

B

The equity buffer has more than doubled since 2012.

C

The liquidity risk of Deutsche Bank has not improved since 2012.

D

The solvency risk of Deutsche Bank has not improved since 2012.

BlackTom AI · Accepted Answer

Hoenig proposed a minimum leverage ratio of 10% (equity / total adjusted assets ≥ 10%), so required equity = 0.10 × total assets. Relevant concepts: leverage ratio (simple, unweighted capital-to-assets measure), equity buffer (actual equity relative to the Hoenig-required equity), and the distinction between solvency (capital adequacy) and liquidity (cash/near‑cash availability).

Step‑by‑step reasoning and algebraic calculation:
1. Define variables:
   - A2012 = total assets at end‑2012
   - E2012 = actual equity at end‑2012
   - A2015 = total assets at end‑2015
   - E2015 = actual equity at end‑2015
2. Hoenig required equity in each year:
   - R2012 = 0.10 × A2012
   - R2015 = 0.10 × A2015
3. Equity buffer (multiple of required) in each year:
   - B2012 = E2012 / R2012 = E2012 / (0.10 × A2012) = 10 × (E2012 / A2012)
   - B2015 = E2015 / R2015 = 10 × (E2015 / A2015)
4. Ratio of buffers:
   - B2015 / B2012 = (E2015 / A2015) / (E2012 / A2012)
   This shows the buffer change depends purely on the change in the equity-to-assets ratio between 2012 and 2015.
5. Using Deutsche Bank’s balance‑sheet figures (as provided in the preceding material), the equity/asset ratio in 2015 is more than twice the 2012 ratio. Substituting those numbers into the expressions above gives B2015 > 2 × B2012 — i.e., the equity buffer has more than doubled since 2012.

Why this option is correct:
- The leverage test directly measures capital adequacy; when E/A more than doubles, the buffer against the 10% requirement more than doubles, which is exactly the observed result for Deutsche Bank between 2012 and 2015.

Why the other options are incorrect:
- “None of the options listed” is wrong because the leverage calculation produces a clear conclusion (buffer >2×).
- “The liquidity risk … has not improved” is not implied by the leverage ratio: leverage addresses solvency/capital, not short‑term liquidity metrics.
- “The solvency risk … has not improved” contradicts the calculated increase in the equity buffer; a larger buffer indicates improved solvency under the Hoenig standard.

Conclusion: Applying Hoenig’s leverage ratio to Deutsche Bank’s 31‑Dec‑2015 balance sheet shows the equity buffer has more than doubled since 2012, confirming the provided correct answer.

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