Question

The bank you own has the following balance sheet: Assets Liabilities Reserves $75 million Deposits $500 million Loans $525 million Bank capital $100 million If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions should you take

Answer 1

Step-by-step explanation:

Calculation of the amount of required reserve as follows:

Required Reserve = Deposit * required reserve ratio

= $500 million * 10%

= $50 million

Therefore, the bank must hold $50 million in required reserve.

It currently has $75 million in reserve so this requirement is met.

If the bank suffers a deposit outflow of $50 million

Assets Liabilities

Reserves - $25 million Deposits - $450 million

Loans - $525 million Bank capital - $100 million

So the required reserve is $450 * 10/100 = $45 million.

But in the reserve account we have only 25 million so we are falling short of $20 million. We need to maintain this required reserve so we can take following actions: 1. By borrowing $20 millions from other bank or financial institutions or corporations. 2. We can sell securities of $20 million. 3. We can borrow some money and can raise some money by issuing securities.