Question

Consider 2 banks. Each have $100 million in checkable deposits. Both face a required reserve ration of 10%. Bank A keeps no excess reserves, while Bank B keeps $10 million in excess reserves. Both banks loan out all remaining funds into loans. Now assume both banks face a deposit outflow of $5 million, calculate the new level of reserves required for Bank A and Bank B. Do either bank have a reserve short fall? If so what would the cost of making up the short fall be assuming they take a discount loan with a rate of .25%?

Answer 1

Here,

Reserve Requirement =10%

Bank A and Bank B checkable deposits = $100 million

Required Reserves by each,

Bank A = 10%*100 = $10 million

Bank B = $10 million

Bank B has $10 million excess reserves,

So Reserves with

Bank A = $10 million

Bank B = ($10 + $10) million = $20 million

Now with $ million outflow,

Bank A reserves = $10 million - $5 million = $ 5 million

Bank B reserves = $20 million - $5 million = $15 million

So Bank A has reserve short fall of $ 5 million

Cost of making up shortfall = .25% * 5million = $12,500