The primary role of capital for a bank is to assure the highest possible return on equity for its shareholders.

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The statement presented is: 'The primary role of capital for a bank is to assure the highest possible return on equity for its shareholders.'
Option 1: TRUE. This claim is misleading because while banks seek to maximize value for shareholders, the primary role of capital is not to guarantee the highest possible return on equity. Capital serves multiple essential functions, including absorbing losses to protect depositors and the financial system, meeting regulatory capital requirements, and supporting sustainable lending growth. Focusing solely on the highest ROE could encourage excessive risk-taking and undermine safety and soundness.
Option 2: FALSE. This option correctly reflects that capital has a broader and more foundational purpose beyond pursuing the maximum ROE. Regulatory frameworks (like Basel III) emphasize capital adequacy to absorb losses, maintain liquidity, and ensure resilience during stress, which means capital has a risk-buffering and systemic-stability role in addition to supporting profitability.
In sum, the proper understanding of bank capital encompasses safety, loss absorption, regulatory compliance, and prudent lending capacity, not merely chasing the top return on equity for shareholders.

BU.232.715.81.SP25 HW5

The primary role of capital for a bank is to assure the highest possible return on equity for its shareholders.

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