Assume that the legal reserve requirement is 10 percent on all deposits. Suppose

Question

Assume that the legal reserve requirement is 10 percent on all deposits. Suppose BoA has $200 million in checkable deposits, $30 million in reserves, $50 million in securities, and $150 million in loans.

(1 point) What is BoA’s bank capital? Draw a balance sheet (T-account) for BoA.

(1 point) How much does BoA hold in excess reserves? How is this related to liquidity risk? Explain.

(2 points) Assume that Sac of Money Bank (a small local bank in Sacramento) has the following balance sheet information: $25 million in checkable deposits, $22 million in loans, $1 million in bank capital, and no excess reserves. How much is Sac of Money Bank holding in securities and reserves?

(2 points) Assume that both banks have the same return on assets (per dollar). Which bank has a higher return on equity? Which bank is less likely to become insolvent? Explain.

Explanation / Answer

a. Checkable deposits are liabilities to the depositors. Here,

Liabilities- $200 million,

Assets: $30 million reserves in cash, $50 million in securities, $150 million in loans.

Bank capital = Value of assets- liabilities = 230-200 = $30 million

b. Excess reserves are the reserves over the reserve requirement , 10% of 200 = 20 million, so BoA holds $10 million in excess resserves.

c. Sac of money

Assets= 22 million in loand and Rs. X in reserves, liabilities = 25 million in demand deposits.
Also, bank capital= assets - liabilities

22+ reserves - 25 = 1

reserves = 1+3= $4 million

d. return on equity = assets/equity

The bank with more value of assets is less likely to become insolvent. That is BoA

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