Question

The bank you own has the following balance sheet:

   Assets      Liabilities

Reserves   $75 million    Deposits      $500 million

Loans $525 million    Bank Capital    $100 million

If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

Answer 1

Bank balance sheet says that their assets = liabilities = $600

If President of a bank make these statement about that bank, I will look for other information of the bank because in case of economic stagnation, people will start withdrawing their money and their reserves is just 15% of the demand deposits of people. If people start withdrawing their money, they will have to call out their loans immediately or sell securities. If any depositor come to take their money and bank is not able to return their money because of 0 reserves they have, they will loose all credibility which will reduce share price. If economic conditions are good and remain good for some time, we can see a little rise in stock price after President statement.