Question

The bank you own has the following balance sheet:

Assets Liabilities

Reserves $150 million Deposits $1000 million
Loan $1050 million Bank Capital $ 200 million

If the bank suffers a deposit outflow of $100 million with a required reserve ratio on deposits of 10%, what actions you must take to keep your bank from failing?

Answer 1

If the bank suffers a deposit outflow od $100 million, the new deposit will be 1000-100=900 million

Now, the new required reserve will be required reserve ratio * deposit = 10%*900 = 90 million

Now, the deposit must be paid from the reserve, so the new reserve amount will be 150-100=50 million

So, it needs an additional 90-50 = 40 million to meet its reserve requirement.

Thus, to stop a failure, the bank needs to borrow 40 million cash from outside so that both the bank capital and reserve increase by 40 milllion.