The balance sheet for Springtime National Bank as of yesterday is shown below. U

Question

The balance sheet for Springtime National Bank as of yesterday is shown below. Use it to answer the questions that follow. The required reserve ratio is 12%.

a) What is maximum amount that Springtime could increase their loan portfolio? (i.e. how much more can they lend out?)

b) From the original balance sheet, suppose that Springtime had to write down $1,700,000 in mortgage loans due to foreclosures. How would that change their balance sheet?

c)

Suppose that the circus is coming to town and lots of depositors will want to withdraw cash. From the original balance sheet, can the bank withstand a deposit outflow of $375,000? Will they need to make changes to their other asset holdings to meet their reserve requirement? If so, what should they do?

Asset Liablities Vault Cash              405,000 Checkable Deposits            6,291,000      Reserves at the Fed             500,500 Saving Deposits        11,900,000 30 Day Treasury Bills      5,300,000 Long-term Time Deposits   10,500,000 10 Year Treasury Bonds 6,200,500 Discount Loans                              0 Mortgages                      21,500,000 Federal Funds Loans                1,500,000 Federal Funds Loans                     0 Bank Capital                                 3,715,000

Explanation / Answer

The money multiplier = 1/reserve ratio = 1/.12 = 8.333
a) Since, reserve at Fed = 500500 $
So , required reserve = .12 * 500500 = 60060 $
So, maximum amount that can be lend to increase portfolio = 500500 - 60060 = 440440 $
b)

c)  Vault cash goes down and it's reduction is reflected in saving deposits. The change is shown below :-

Asset Liablities Vault Cash 405000 Checkable Deposits            6,291,000 Reserves at the Fed 500,500 Saving Deposits        11,900,000 30 Day Treasury Bills      5,300,000 Long-term Time Deposits   10,500,000 10 Year Treasury Bonds 6,200,500 Discount Loans                              0 Mortgages          (21,500,000- 1700000) = 19800000 Federal Funds Loans           0 Federal Funds Loans                     0 Bank Capital                                 3,515,000

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