The Waters 348 Bank has the following assets and liabilities: • Reserves: $50 mi

Question

The Waters 348 Bank has the following assets and liabilities:

• Reserves: $50 million• Securities Receivable: $8 million• Loans Receivable: $140 million• Other Assets: $2 million• Transactions Deposits: $180 million• Equity Capital: $20 million
Assume the required reserve ratio = 10%
Questions:
(a) How much of the reserves on hand are required reserves, and how much are excess reserves?
(b) Create this bank’s T-account, breaking up the reserves into its required and excess components.
(c) What is the maximum amount of loans this bank can legally generate given thecurrent required reserve ratio?
(d) What are the balance sheet changes when making those loans?

(e) Create the bank’s T-account after making those loans.

(f) If people with deposits now withdraw $30 million, what would be the balancesheet changes?

(g) Create the bank’s T-account after those withdrawals.
(h) What is the bank’s current reserve ratio? Is it above or below the required ratio?If below, what are three options the bank can use to get its reserves back up to the required level?

Explanation / Answer

(a) Required Reserves = Reserves x Required reserves ratio

= $50 million x 10% = $5 million

Excess reserves = total reserves - required reserves

= $50 million - $5 million

= $45 million

(b) The T-account is set up as follows.

(c)

The bank can make loans from the excess reserves, that is, the maximum amount of loans it can make is $45 million.

(d)

Loans given out are assets. If the bank gives out entire amount of excess reserves, it will have an excess reserves balance of 0.

In the asset sides, excess reserves will decrease by $45 million & loans will increase by $45 million, netting out the effect on asset side. The liability side will remain unchanged.

(e) The changes are shown below.

(f) If $30 million deposits are withdrawn, Transaction deposits will decrease to $150 million and excess reserves will decrease by $30 million. Since excess reserves is 0 9by parts (c) & (d)], the bank has to liquidate (call back or retire) its loans receivable from asset side to meet the withdrawal of deposits.

(g) The change is shown as follows.

NOTE: Out of 8 sub-parts, the first 7 are answered.

ASSETS $ LIABILITIES $ Securities Receivable 8 Transaction Deposits 180 Loans Receivable 140 Equity 20 Required Reserves 5 Excess Reserves 45 Other Assets 2 Total assets 200 Total equity 200

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