Question

In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first $30 million of checkable deposits and 12% on any checkable deposits over $30 million.

Assets		Liabilities
Reserves	$18.9	Checkable deposits	$180.0
Loans	150.0	Net worth	20.0
Securities	31.1

Calculate the bank’s excess reserves. (10 points)

Suppose that the bank sells $5 million in securities to get new cash. Show the bank’s balance sheet after this transaction. What are the bank’s new excess reserves?

Answer 1

(a)

Total checkable deposits = $180 million

The required reserve ratio is 3% on the first $30 million of checkable deposits and 12% on any checkable deposit over $30 million.

Required reserves = ($30 million * 0.03) + ($150 million * 0.12) = $0.9 million + $18 million = $18.9 million

Excess reserves = Total reserves - Required reserves = $18.9 million - $18.9 million = $0

The bank's excess reserves are $0.

(b)

Bank sells $5 million in securities to get new cash.

Following is the Bank's balance sheet after this transaction -

Assets		Liabilities
Reserves	$23.9	Checkable deposits	$180
Loans	150	Net worth	20
Securities	26.1

The bank's new excess reserves is $5 million.