Question

Consider a bank with the following balance sheet: Assets: Reserves $100K and Loans $1 million. Liabilities: Checking Deposit $1 million. Net worth: $______

Assume $50K in deposits are suddenly withdrawn

i) Show how this affects the balance sheet (on both sides)

ii) Is the bank now in compliance with the minimum reserves discussed in (b)? If not, explain what the bank must do.

Answer 1

Calculation of networth

Networth = Total assets - Total liabilities

= $100,000 + $1000,000 -$1000,000

= $100,000

i) IF $50,000 in deposits are suddenly withdrawn, then

revised deposits = $1000,000 - $50,000 = $950,000

In Balance sheet, $50,000 will be deducted from cash in Assets side and on liabilities side, $50,000 will be reduced from deposits of $1000,000 which will become $950,000.

ii) referred part (b) is missing in information, for same you can comment on this answer with information.