The following entries (in millions of dollars) are from the balance sheet of Con

Question

The following entries (in millions of dollars) are from the balance sheet of Coner National Bank.

U.S. Treasury bills

$20

Demand deposits

40

Mortgage-backed securities

30

Loans from other banks

5

C & I Loans

50

Discount Loans

5

NOW accounts

40

Savings accounts

10

Reserve deposits with Federal Reserve

8

Cash items in process of collection

5

Municipal bonds

5

Bank building

4

a) Use the entries to construct a balance sheet.

b. Coner National Bank’s capital is what percentage of its assets?

c. If the required reserve ratio is 10%, is Coner holding excess reserves? If so, how much?

U.S. Treasury bills

$20

Demand deposits

40

Mortgage-backed securities

30

Loans from other banks

5

C & I Loans

50

Discount Loans

5

NOW accounts

40

Savings accounts

10

Reserve deposits with Federal Reserve

8

Cash items in process of collection

5

Municipal bonds

5

Bank building

4

Explanation / Answer

Solution to part (a):

Assets

U.S. Treasury Bills $20

Mortgage Backed Securities $30

C&I Loans $50

Municipal Bonds $5

Cash items in process of collection $5

Bank Building $4

Reserve deposits with Federal Reserve $8

Total Assets $122

Liabilities

Savings Accounts $10

NOW Accounts $40

Discount Loans $5

Demand Deposits $40

Loans from Other Banks $5

Liabilities $100

Capital $22

Total Liabilities = $100 + $22 = $122

Solution to part (b):

Capital / Asset Ratio = 22/122 = 0.18

Solution to part (c):

To solve for excess reserves, we must first calculate the amount of required reserves using the following formula:

Required Reserves = m * Demand Deposits (Where, m is the required reserve ratio)

= 10% * $40 million = $4 million

The bank has a reserve of $8 million. We solve for excess reserve using the following formula:

Excess Reserves = Reserves - Required Reserves

= $8 million - $4 million

= $4 million

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