Suppose that the First National Bank has the following balance sheet position an

Question

Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 20 percent. Assets Reserves $25 million depsits Loans $75 million Bank Capital Securities $10 million Liabilities $100 million $10 million If the bank suffers the deposit outflow of $6 million, what will its balance now look like Show this by filling in the amounts in the following balance sheet: Assets Reverves Loans Securities Liabilities Deposits Bank Capital Suppose now the bank is hit with another $4 million deposit outflow. What will its balance sheet position look like now Assets Reserves Loans Securities Liabilities Deposits Bank Capital Must the bank make an adjustment in its balance sheet Why After selling off the securities to meet its reserve requirements, what will its balance sheet look like Assets Reserves Loans Securities Liabilities Deposits Bank Capital If, after selling off securities, the bank is not hit by another $10 in withdrawal of deposits and it sells off all its securities to obtain reserves, what will the balance sheet look like Assets Reserves Loans Securities Liabilities Deposits Bank Capital If the bank is now unable to call in or sell any of its loans and no one is willing to lend money to this bank, what will happen to the bank and why

Explanation / Answer

1. Deposit outflow will reduce the Reserves on the asset side and deposits on the liabilities side by $6 Million

Balance Sheet

2. Deposit outflow will reduce the Reserves on the asset side and deposits on the liabilities side by $4 Million

3.  

Assets Amount Liabilities Amount Reserves (25-6) 19 Deposits (100-6) 94 Loans 75 Bank Capital 10 Securities 10 104 104

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