Suppose that the First National Bank has the following balance sheet position an

Question

Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 15 percent Assets Liabilities $200 million Reserves Loans Securities $40 million Deposits Bank Capital $20 million $20 million What are the bank's a) required reserves and b) excess reserves? If the bank was hit with a deposit outflow of $20 million, would it have to make an adjustment to the balance sheet? Why or why not? If the bank has to make an adjustment to its balance sheet, what are its options? Expl

Explanation / Answer

a.

Total deposit = $200 million

Reserve requirement = 15%

Required reserve = $200 × 15%

= $30 million.

Required reserve is $30 million.

Excess reserve = $40 million - $30 million.

= $10 million.

Excess reserve in bank is $10 million.

b.

if bank is hit by any deposit outfolow of $20 million or more, then bank must have make certain adjustment in its balance sheet. the requirement of adjustment is because of to preapre bank more liquid in case of majot outflow of deposit, so it does not suffer from major withdrawal.

c.

Option available with bank is mention below:

1. Invest 20 million (approx) in short term securities or any liquid fund.

2. Keep bit excess cash in its balance sheet.

3. make arrangement with other bank to borrow anytime at lower rate for overnight or for short period of time.

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