Why are we subtracting the economic capital from the total loan value in estimating the ineterst charge?
from our example, Are banks not borrowing 1 billion from the depositors and making a loan for higher charge? The capital requirement for this loan is 100m and banks invest in highly liquid assets to support in case of unexpectetd losses. so we are adding interest on it to the numerator. How bank is raising 100m? is it not from the depositors then in that case banks have to pay interest on 1.1 b not on 900m.
Tks.
from our example, Are banks not borrowing 1 billion from the depositors and making a loan for higher charge? The capital requirement for this loan is 100m and banks invest in highly liquid assets to support in case of unexpectetd losses. so we are adding interest on it to the numerator. How bank is raising 100m? is it not from the depositors then in that case banks have to pay interest on 1.1 b not on 900m.
Tks.