Suppose First National Bank has $200 million of assets and $20 million of equity capital
If First National has a 2% return on assets (ROA), what is its return on equity (ROE)? Suppose First National's equity capital declines to $10 million, while its assets and ROA are unchanged. What is First National's ROE now?
ROE = ROA × (Bank assets/Bank equity capital); ROE = 2% × (200/20 ) = 20%. ROE = 2% × (200/10 ) = 40%.
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