XYZ Bank has the following balance sheet (in $million): Loans 100 Securities 25
ID: 2437161 • Letter: X
Question
XYZ Bank has the following balance sheet (in $million):
Loans 100
Securities 25
Inter-bank Lending 0
Cash/Reserves 10
- -
Demand Deposits 110
Bonds 20
Equity ?
. Here’s ABC Bank’s balance sheet (in $million):
Loans 2000
Securities 250
Cash/reserves 12
- -
Demand Deposits 1000
Bonds 200
Inter-bank Borrowing 1040
Equity ?
Return to the original balance sheets for ABC and XYZ. Suppose reserve requirements are 3% against deposits. What are total, required and excess reserves for XYZ and ABC?
XYZ lends $5 million to ABC in the federal funds market. Show their new balance sheets. What are the new total, required and excess reserves for XYZ and ABC? What are their new leverage ratios compared to question 2.
Show the new balance sheets for ABC and XYZ, as well XYZ’s and ABC’s new reserves positions on the Federal Reserve’s balance shee
Explanation / Answer
For XYZ Ltd.,
Total Assets = (100+25+10) = 135
Total Liabilities = (110+20) = 130
Thus, Total Equity = (135-130) = 5
If the reserves requirement is 3%, then, total reserves = (10+3.3) = 13.3
Required = 3.3 more
Excess = 3.3
For ABC Ltd.,
Total Assets = (2000+250+12) = 2262
Total Liabilities = (1000+200+1040) = 2240
Thus, Total Equity = (2262-2240) = 22
If the reserves requirement is 3%, then, total reserves = (1000+30) = 1030
Required = 30 more
Excess = 30
When XYZ lends 5 million to ABC,
For XYZ Ltd.,
Total Assets = (100+25+10+5) = 140
Total Liabilities = (110+20) = 130
Thus, Total Equity = (135-130) = 10
If the reserves requirement is 3%, then, total reserves = (10+3.3) = 13.3
Required = 3.3 more
Excess = 3.3
For ABC Ltd.,
Total Assets = (2000+250+12) = 2262
Total Liabilities = (1000+200+1045) = 2245
Thus, Total Equity = (2262-2240) = 17
If the reserves requirement is 3%, then, total reserves = (1000+30) = 1030
Required = 30 more
Excess = 30
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