Question

1. Which balance sheet would a bank rather have, Why? (assume a RRR of 10%)

(a)

ASSETS |    LIABILITIES

Reserves 100M | Deposits 500M

Loans 500M | Bank Capital 100M

OR

(b)

ASSETS | LIABILITIES

Reserves 75M | Deposits 500M

Loans 525M | Bank Capital 100M

2. If a deposit outflow of 50M occurs, which balance sheet would a bank rather have initially, Why? (assume a RRR of 10%)

Answer 1

Scenario 2 is always prefered because banks will always prefer more loan out rather than reserves. Reserves is the amount of cash banks keep in hand in order to loan out to it's customers. So if the bank is functioning well it will have low reserve count and high loan count.

2. If a deposit outflow of 50M occurs bank will always prefer to have more liquid money in hand and therefore it will prefer the first balance sheet in which the bank reserves are higher than that of scenario 2.