Question

1. A bank has the following assets:

Assets	liabilities
Reserves $15 million	Deposit $150 million
Loans $150 million	Borrowed funds $35 million
Securities $50 million	Bank capital $30 million

1. If the required reserve rate is 10% and excess reserve is 0.

2. How do you describe the general financial position of this bank ?

Answer 1

The bank has kept the required reserve ratio and it is reflecting that the overall assets which has been kept by the bank is almost in line with the required reserve ratio in respect to the total loan.

The financial position of the bank is not that liquid because the excess reserve does not occur in the books of company and it will also mean that if there is an adverse economic cycle, the bank will be having a very tight liquidity crunch which will be exposing it to the short term lack of availability of fund, because the banks should be having excess reserve in order to have better control over the business and higher liquidity over its business, the bank overall borrowed funds and capital are also representing that the debt to equity ratio is also on the higher side.