Banking Cases 2026: Two Rates and a Capital Ceiling

The equation a balance sheet actually obeys

Write the income statement the way a bank reports it, and the branches name themselves.

Net interest income equals earning assets times the average asset yield, less funding liabilities times the average rate paid. Add fee and commission income. Take off operating expense. Then take off the provision for credit losses, which is the line that turns a good year into a bad one. What remains is pre-tax profit.

Two rates, two stocks, and a charge for loans that will go bad. The margin that summarizes the whole thing is net interest income over average earning assets, quoted in basis points.

One term is missing from that list, and it decides whether any recommendation is possible. A bank has to hold equity against its risk weighted assets. Writing more business consumes capital. So the tree has a fifth branch that no profitability framework carries: how much equity does this plan need, and what does the plan return on that equity.

Both rates in the equation are public. The FDIC publishes a deposit weighted national average, which stood at 0.37 percent on savings and 0.07 percent on interest checking as of 21 September 2026, checked 30 September 2026 at fdic.gov. A twelve month certificate paid 1.73 percent. The Federal Reserve put the three month Treasury bill at 4.10 percent and the ten year at 5.24 percent on 28 September 2026, checked 30 September 2026 at federalreserve.gov. A bank that funds at 0.37 and lends against a 4.10 percent risk free curve is working a gap of 373 basis points. That gap is the business.

Meridian Savings, line by line

Meridian Savings is a regional retail bank. The chief executive wants to know whether to push a two billion dollar loan growth plan. Here are the figures, and say out loud that the last two are assumptions rather than facts.

1. Earning assets. $18.0 billion, average yield 5.30 percent.
2. Deposits. $16.0 billion, average rate paid 1.10 percent.
3. Total assets. $19.0 billion.
4. Fee income. $120 million a year.
5. Operating expense. $560 million a year.
6. Loans. $14.0 billion, expected annual charge-off rate 0.55 percent.
7. Risk weighted assets. $12.0 billion, common equity held at 11 percent of them.

Interest income first. 5.30% on $18.0 billion is $954 million.

Interest expense second. 1.10% on $16.0 billion is $176 million.

So net interest income is $954 million less $176 million, which is $778 million. The margin is 778 over 18,000, which is 4.32 percent. Quote it as 432 basis points if you want the room to relax.

Now the rest of the statement. Add $120 million of fees and take off $560 million of operating expense, which leaves $338 million before any credit charge. The provision comes next: 0.55% on $14.0 billion is $77 million. Pre-tax profit is $338 million less $77 million, which is $261 million. Tax at 21 percent takes $54.8 million, leaving net income of $206 million, rounded to the nearest million.

Two ratios close the picture. Equity is 11 percent of $12.0 billion, so $1.32 billion. Return on equity is 206 over 1,320, which is 15.6 percent. Return on assets is 206 over 19,000, which is 1.08 percent. The FDIC reported an industry return on assets of 1.37 percent in the second quarter of 2026 alongside aggregate net income of $90.1 billion, checked 30 September 2026 at fdic.gov. Meridian sits well under the industry. That comparison is the sanity check, and it is the sort of line an interviewer waits for.

What fifty basis points of deposit repricing costs

The asset yield is contractual for years on a fixed rate book. The deposit rate is not. Depositors move, and the rate a bank pays catches up to the market with a lag. How fast it catches up is the single most dangerous assumption in a banking case.

Suppose Meridian's average deposit rate rises from 1.10 to 1.60 percent. That is fifty basis points on $16.0 billion, which is $80 million of extra interest expense a year.

Follow it down the statement. Pre-tax profit falls from $261 million to $181 million. After 21 percent tax that is $143 million. Return on equity falls from 15.6 percent to 10.8 percent.

Read what that shows. Fifty basis points on the funding side removed 4.8 points of return on equity, and the loan book did not change at all. The plan was never about lending. It was about how long the bank can hold 1.10 percent while the market pays 4.10.

The margin in the right column is 698 over 18,000, which is 3.88 percent. Notice also that the cost to income ratio barely moves here. Operating expense is unchanged and the margin absorbs the whole shock, so a cost program would have answered a different question.

The capital test on the growth plan

Now answer the question the chief executive asked. Two billion dollars of new loans at a 100 percent risk weight lifts risk weighted assets from $12.0 billion to $14.0 billion. At 11 percent, required equity rises from $1.32 billion to $1.54 billion. The plan needs $220 million of fresh equity before it lends a dollar.

What does that equity earn? The new loans carry the same 4.20 percent spread, so 4.20% on $2.0 billion is $84 million of net interest income. Provisions take 0.55 percent of the new book, which is $11 million. Say the plan adds $15 million of operating expense for underwriting and servicing. Pre-tax contribution is $84 million less $11 million less $15 million, which is $58 million. After 21 percent tax that is $45.8 million.

Return on the incremental capital is 45.8 over 220, which is 20.8 percent. That beats the 15.6 percent the bank earns today, so the plan raises the average rather than diluting it. Recommend it, and name the two conditions it rides on: the spread holds at 4.20 percent, and the charge-off rate holds at 0.55 percent.

Test the second condition, because it is the one that breaks. If charge-offs on the new book run at 1.40 percent instead of 0.55, provisions rise to $28 million, pre-tax contribution falls to $41 million, and after tax the plan returns 32.4 over 220, which is 14.7 percent. Below the existing 15.6 percent. So the plan is accretive down to a charge-off rate somewhere just under 1.40 percent, and the interviewer will ask you to bracket it.

Three units that get swapped in a banking case

The arithmetic above is easy. The errors are almost never in the multiplication.

1. Margin on the wrong denominator. Net interest margin is taken on average earning assets. Taking it on total assets gives 778 over 19,000, which is 4.09 percent rather than 4.32. Both numbers are arithmetically fine and only one answers the question.
2. Spread confused with margin. The spread here is 5.30 less 1.10, which is 420 basis points. The margin is 432. They differ because equity funds part of the book at no interest cost, and a candidate who quotes one as the other has not understood where the extra 12 points come from.
3. Basis points read as percent. A 25 basis point move is 0.25 percent, and on $16.0 billion it is $40 million. Saying 25 percent instead is a factor of a hundred, and the total will still read like a bank.

A fourth trap sits outside the arithmetic. Provisions are an estimate of future losses, and charge-offs are losses already taken. They sit on different lines and move at different times. A case that treats them as one number will get the direction of a credit cycle backwards.

Where a banking answer loses its points

Our structuring rubric puts four weights on a structure, and the weights below are ours. No consulting firm publishes a rubric, which is one of the few constants in this market. The reasoning behind each weight is on how an answer is assessed.

Drilling the banking case spread by hand

Rework Meridian with one input changed at a time, and say the unit before each product.

Start with the asset side. Take the yield from 5.30 to 5.75 percent: interest income becomes 0.0575 times 18,000, which is $1,035 million, and net interest income becomes $859 million. Pre-tax profit becomes $342 million. So 45 basis points on the asset side is worth $81 million, almost exactly what 50 basis points on the deposit side cost. The book is nearly symmetric, and knowing that tells you which side to defend first.

Then break the symmetry on purpose. Deposits are $16.0 billion and earning assets are $18.0 billion, so a rate move on the asset side lands on a bigger base. Equal moves are therefore not equal in dollars, and the ratio is 18 to 16, or 1.125.

Our breakeven calculator handles the fixed cost algebra when a case asks for a volume threshold, and the structuring drill will time a spread tree and score its separation. Both are free and need no account. Neither knows what a risk weight is.

For the fee driven side of finance, where revenue is a rate on assets you manage rather than assets you own, see financial services cases. For the payments economics that sit next door, see fintech cases. For the general shape of a profit tree before a sector bends it, see the profitability framework.