3. Your Friendly National Bank holds $50 million in reserves at its Federal Rese

Question

3. Your Friendly National Bank holds $50 million in reserves at its
Federal Reserve District Bank. The required reserves ratio is12 percent.
a. If the bank has $600 million in deposits, what amount of
vault cash would be needed for the bank to be in compliance
with the required reserves ratio?
b. If the bank holds $10 million in vault cash, determine the
required reserves ratio that would be needed for the bank to
avoid a reserves deficit.
c. If the Friendly National Bank experiences a required reserves
deficit, what actions can it take to be in compliance with the
existing required reserves ratio?

Explanation / Answer

a) From Required reserve ratio, Required reserve ratio = Required reserves / Deposit,,,, 0.12 = Required reserves / $600,000,000, Required reserves = $72,000,000, But we know that, Reserve deficit = Total reserves - required reserves, = $50,000,000 - $72,000,000, = $22,000,000, Therefore, there is a deficit of $22,000,000 in the bank reserves which the bank has to cover.The amount of vault cash is $22,000,000....----------------------- B) Here the vault cash is $10,000,000 which is the reserve requirement...... Computing the requierd reserve ratio::::: Required reserve ratio = Required reserves / Deposits, = $10,000,000 / $600,000,000, = 0.0167 or 1.67%.... C) If there is a deficit in the required reserves, then the excess reserves should be increased to compliance with the required reserve ratio.The excess reserves should be in the form of selling loans to other banks and selling assets.

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