Question

Savage National Bank [SNB] shows the following balances on its most recent balance sheet:

Cash in Vault = $25,000

Reserve Deposits with FED = $45,000

Treasury Securities = $10,000

Consumer Loans = $300,000

Commerical Loans = $400,000

Checkable Deposits = $600,000

Time Deposits = $180,000

If Hashim, a SNB customer, withdraws $80,000 from his certificate of deposit that has matured and deposits the money into his checking account, would the bank need to add to its total reserves? Why or why not?

Answer 1

Answer: There is no need to add.

The required reserve, which may be cash in vault and/or deposit with FED, must be calculated on total deposit, which is the aggregate of time deposit and checkable deposit. This is already done based on the balances shown.

Total deposit = Time deposit + checkable deposit = 180000 + 600000 = $780,000

Total reserve = Cash + FED = 25000 + 45000 = $70,000

Now, time deposit is reduced to (180000 – 80000 =) 100000 and checkable deposit is increased to (600000 + 80000 =) 680000, making the same total deposit (100000 + 680000 =) $780,000.

Since the related and necessary reserve is already done through $70,000 earlier, there is no need to create reserve again.

answered by: anonymous