Suppose the bank you own has no excess reserves and a current, large, and valuab

Question

Suppose the bank you own has no excess reserves and a current, large, and valuable customer (one who has taken out many loans and always paid them back) approaches the bank asking for a loan. List two things the bank can do to provide the funds to loan the customer. Would a well-run bank ever be in such a position where it wanted to (because a customer wanted a loan) or had to (because of depositors withdrawing from their accounts) take the actions you suggested in (a) because of little, no, or negative excess reserves? Why or why not?

Explanation / Answer

The bank can take the following actions immediately Borrow from the market sufficient funds to meet the loan requirements of the valuable customer Sell some of the assets held by the bank to raise sufficient funds to lend to the valuable customer A well-run bank would have to maintain sufficient reserves with the central bank. In addition to this, Bank management would have to keep sufficient funds at all time for such eventualities. In this particular case it appears that the Banks investment strategies and assets management has failed to follow the capital adequacy norms. Lack of sufficient funds with the bank would mean : It is not able to attract sufficient deposit accounts and has poor image in the market. It has poor marketing strategies to get depositors Bank customers have lost confidence the bank and have withdrawn all deposits due to fear of failure or bad service etc.. A well run, prudently managed bank would not find itself in this position

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