Question

Suppose a bank currently has $150k in deposits and $15k in reserves. The required reserve ratio is 10% (so this bank holds no excess reserves). If there is a deposit outflow for $5k, what would be the bank's resulting reserve ratio?

What would it cost the bank in $s to comply if it decided to borrow fed funds from another bank at a fed funds rate of 0.25%?

What would be the cost in $s for this bank to comply with its required reserves if the bank decides to borrow from the Fed's discount window at 0.75%?

Answer 1

If there is an outflow of $5k, then resulting reserve ratio will be $15k/$(150-5)k = 10.34%.

The end of the day balances in the bank's account are used to determine whether it meets its reserve requirements. If a bank expects to have end of the day balances greater than what is required, it can lend the excess amount to an institution that anticipates a shortfall in its balances.

For every $1k, averaged over two week reserve maintenance periods (i.e., 14days), at the rate 0.25% will be