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: 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.
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