How much of an increase in bad loans

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Reference no: EM13129626

Banks have receivables that are the result of investing activities rather than sale or trade. We call these signed documents notes receivable. That being said, notes receivable also have to set up an "allowance for loan losses" which works just like the allowance for doubtful accounts. Most banks earn a return of only 1% on their total assets. More than 50% of those assets are usually in loans.

Picture a bank that has $1 billion in total assets, $500 million in loans, and normally makes $10 million in profit. How much of an increase in bad loans would it take (in %s) to wipe out that profit? Explain.

Reference no: EM13129626

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