Question

1. Your bank has the following balance sheet:

Assets                                           Liabilities                                          

Reserves               $50 million     Checkable deposits     $200 million

Securities             50 million      

Loans                    150 million     Bank capital                50 million      

If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

Answer 1

The bank has checkable deposit of - $200 Million

When there is Deposit outflow of $50 Million then the bank would pay this from it's reserve and it will go zero after the payment.

Checkable deposit after withdrawl - $200 Million - $50 Million

= $150 Million

Reserve Requirement = Reserve Ratio * Checkable deposit

= 150 Million * 10%

= $15 Million (Shortfall in Reserve)

Actions that a bank manager can take:

1. The bank manager can boorow these finds from the Federal fund markets.

2. He can take a loan from the federal reserve.

3. Bank manager can sell the securities or the loans.

4. He can raise $15 Million loans.

These are the methods that a manager could take to acquire the funds, the best feasible option would be which is least costllier to the bank.