Question

1. A bank has the following balance sheet

Assets                                      Liabilities                           

Reserves          $100 million      Deposits      $450 million

Loans              $500 million      Capital        $150 million

a). How much does this bank maintain in terms of reserve ratio? (Hint: the reserve ratio is NOT 10%. It is just an example discussed in the slides and in the book. You need to calculate the reserve ratio maintained by this bank).

b). Suppose the bank has an increase in deposit inflows in the amount of $50 million. It chooses not to make any additional loans out of its deposits. What does the balance sheet look like now? Produce the balance sheet of the bank after the deposit inflow.

Answer 1

a) Reserve ratio = (Reserves/Deposits*100 = (100/450)*100 = 22.22%

b) New deposits = 450 + 50 = $500 million
These are not lent out so they become a part of reserves. So, total reserves = 100 + 50 = $150 million
Thus, the balance sheet is:

Assets                                      Liabilities                           

Reserves          $150 million      Deposits      $500 million

Loans              $500 million      Capital        $150 million