The balance sheet of a bank follows. Suppose that the reserve requirement is 3 p

Question

The balance sheet of a bank follows. Suppose that the reserve requirement is 3 percent on the first 30 million of checkable deposits and 10 percent on checkable deposits in excess of 30 million. Assets: Rerserves $15.9 Loans $150.0 Securities $34.1 Total $200.00 Liabilities and Capital: Transaction deposits $180.0 Equity Capital $20.0 Total $200.0 A) Calculate the banks excess reserves B)Suppose that the bank sells $5 million in securities to get new cash. Show the banks balance sheet after this transaction. What are the banks excess reserves. C)Suppose that a bank makes a loanto a customer equal to the amount of its excess reserves from part b. Show the banks balance sheet before the customer spends the proceeds of the loan. What are the banks excess reserves? D)Now suppose that the customer spends the proceeds of the loan. Show the banks balance sheet, and calculate its excess reserves

Explanation / Answer

Assets -------------- Liabilities + Capital
Reserves------------- $15.9 Transactions deposits ---------$180.0
Loans ---------------- $150.0   Equity capital --------------$20
Security--------------- $34.1
Total ---------------   $200.0   Total ------------------ $200.0

a)

$30 million times 3% = $.9 million and $150 Million times 10% = $15 Million
So we have the total Reserve is = to $15.9 million, thus the excess reserve is zero

b)

The calculation of Excess Reserve is: $30 million times 3% = $.9 million and $150 million times 10%
= 15 million.

We have total required reserve is equal to $15.9 million, thus the excess reserve is
5 Million. 20.9 subtract 15.9 = $5 million

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