Question

Suppose a bank is FDIC insured and has $400 million in checkable deposits, $78 million in vault cash, $40 million on reserve at the Fed, and $20 million of savings and other non-transaction deposits. If the required reserve ratio is 10%, then what is the largest loan it can approve? State your answer in integer millions.

Answer 1

Reserve requirement is applicable on the checking account deposits only.

Required reserve ratio = 10% or 0.10

Checkable deposits = $400 million

Required reserves = Checkable deposits * Required reserve ratio

Required reserves = $400 million * 0.10 = $40 million

Total reserves = Vault cash + Reserves at the Fed = $78 million + $40 million = $118 million

Excess reserves = Total reserves - Required reserves

Excess reserves = $118 million - $40 million = $78 million

The excess reserves with bank is $78 million.

A bank can make, at maximum, a loan of amount equal to the amount of excess reserves it held.

Thus,

The largest loan it can approve is of $78 million.