Question

Suppose a bank’s liquidity division estimates that it holds $19 million in hot money deposits against
which it will hold an 80 percent liquidity reserve, $54 million in vulnerable funds against which it plans
to hold a 25 percent reserve and $112 million in stable or core funds against which it will hold a 5
percent liquidity reserve. The bank expects its loans to grow 8 percent annually; its loans currently stand
at $117 million but have recently reached $132 million. If reserve requirements on liabilities currently
stand at 3 percent, what is this depository institution’s total liquidity requirement?

Answer 1

Banks total liquidity requirement: 0.80(Hot money funds – Req legal reserve) + 0.25(Vulnerable deposits - Req legal reserve) + 0.05(Stable deposits - Req legal reserve) + 1.00 (Potential loan outstanding-Actual loan outstanding)

Deposit/Non-deposit Funds plus Loans

0.80 ($19 million - 0.03 X $19 million)

+0.25 ($54 million — 0.03 X $54 million)

+0.05 ($112 million — 0.03 X $112 million)

+$132 million X 0.08 + ($132 - $117 million)

= $14.744 million + $13.095 million + $5.432 million + $25.56 million

= $58.831 million (held in liquid assets and additional borrowing capacity)