Question

A bank has the following assets: Reserves of $15 million; Loans of $150 million; and
Securities of $50 million. Their liabilities include Deposits of $150 million; Borrowed funds of
$35 million and Bank Capital of $30 million. If the required reserve rate is 10 percent, answer the following:

a. What is the amount of excess reserves the bank is currently holding?
b. What are the options available to the bank if customers decide to withdraw $10 million in deposits?

Answer 1

1) Excess reserves = $0

Working: Deposits = $150 million; Required reserves = 10% * $150 million = $15 million

Actual reserves = $15 million

Thus excess reserves = Actual reserves - Required reserves = $15 million - $15 million = $0 million

2) Assuming that customer’s makes a decision to withdraw $10 million from the bank the bank can fulfill the requirements either through the asset adjustment or liability adjustment. From the asset adjustment side the bank could make the adjustment by selling the securities for cash or not renewing some loans. Because the bank is interested in on keeping the good relations with the customer relations thus tends to opt for the selling of securities. From the liability adjustment side, the bank would probably opt for increasing the deposits, borrowing additional funds or providing an attractive rate of interest on long-term CDs.