Question

A problem bank (Bank A or Bank B) must maintain a 10% required reserve ratio. The problem bank has to increase its reserves to meet legal requirements. Use the balance sheet of the bank to show how it can increase its reserves by using itssecurities.(4 points)

Bank A Balance Sheet

Assets                                      Liabilities                           

Reserves            $40 million      Deposits      $500 million

Loans              $540 million      Capital        $100 million

Securities         $20 million

Bank B Balance Sheet

Assets                                      Liabilities                           

Reserves            $50 million      Deposits      $500 million

Loans               $500 million      Capital        $100 million

Securities          $50 million

Answer 1

Bank A

Deposit = $500 million

Required reserve ratio = 10%

Required reserves = Deposits × required reserve ratio

Required reserves = $500 million × 0.10 = $50 million

The Bank A has to maintain $50 million as required reserves.

The Bank A has reserves of $40 million.

Bank B

Deposits = $500 million

Required reserve ratio = 10%

Required reserves = Deposits × required reserve ratio

Required reserves = $500 million × 0.10 = $50 million

The Bank B has to maintain $50 million as required reserves.

The Bank B has reserves of $50 million.

It can be seen that Bank A has less than required reserves.

So,

Bank A is the problem bank.

Bank A has to increase its reserves by $10 million.

Bank A has securities of $20 million.

So,

Bank A must sell securities worth $10 million to bring it's it's reserves to the required level.