Final answer:
The Federal Reserve would contact ABC
Bank immediately to address the failure to meet liquidity ratio requirements, and the bank may be required to adjust its balance sheet, including reducing loans, to restore required reserves after an open market sale.
Step-by-step explanation:
If ABC Bank fails to meet the liquidity ratio requirements, the likely next steps could include the following.
Option A might be accurate as the Federal Reserve often works with banks to address and resolve issues pertaining to reserve requirements.
Option B is also a viable next step since the Federal Reserve typically contacts bank authorities as soon as a problem is detected to discuss the liquidity situation.
Option C, involving the temporary closure of the bank, is usually a more drastic measure and may not occur immediately, but could happen if other resolutions are not feasible or if the bank's situation poses a significant risk to the financial system.
Option D is incorrect as the Federal Reserve does not have a specific 30-day period in which they must contact bank authorities; such communication generally occurs much more quickly to promptly address reserve requirement issues.
When the Fed conducts an open market sale like the one described where they sell $10 million in Treasury bonds to Acme Bank, the bank will see a change in its balance sheet that affects its reserves. After purchasing the bonds, Acme Bank's reserves would decrease by $10 million. Since Acme Bank is required to hold 10% of deposits as reserves, and if they maintain deposits of $300, they must hold $30 in reserves
. Initially, after the bond purchase, the reserves would fall below the required level, and the bank would need to restore its reserves to the required level by decreasing its loans. This action would involve calling in or selling off loans to increase the reserves held by the bank back to the minimum required level.