Question

500.00 has been deposited into Bank A. The required reserve ratio is 10%,
but Bank A also holds 30.00 in excess reserves. Bank A suffered
Depreciation of the deposit is 50.00.

(a). Indicate what will happen to Bank A's balance sheet as a result of the transaction

(b). Indicate what will happen to Bank A's balance sheet as a result of the transaction
if the bank does not hold any excess reserves.

(c). Explain THREE ways in which banks can increase their reserves. Share it
each of these ways, indicate what will happen to the balance sheet
Bank A as a result of the transaction.

Answer 1

1.

Required Reserve = 500*10% =50

Excess reserve =30

Total Reserve = 50+30 = 80

Loan = 500-80= 420

Asset	Amount	Liability	Amount
Reserve	80	Deposit	500
Loan	420
Total	500	Total	500

a) If deposit depreciated by 50

Bank deposit will reduce to 500 -50 =450

Required reserve =450*10% =45

Current reserve =80 -50 = 30

Bank balance sheet reduce by 50 ,Now reserve is short by 45 -30 =15 so bank can either reduce the loan or reserve.Since it is not difficult to reduce disbursed loan amount so reserve will reduce by 15

Asset	Amount	Liability	Amount
Reserve	30	Deposit	450
Loan	420
Total	450	Total	450

b. If bank does not hold any excess reserve :

Asset	Amount	Liability	Amount
Reserve	50	Deposit	500
Loan	450
Total	450	Total	500

Bank deposit will reduce to 500 -50 =450

Required reserve =450*10% =45

Current reserve =50 -50 = 0

Bank balance sheet reduce by 50 and Now reserve is short by 50 -50  =0

Asset	Amount	Liability	Amount
Reserve	0	Deposit	450
Loan	450
Total	450	Total	450

3. Bank can increase their reserve by

1. Borrow funds from Federal bank

Asset	Amount	Liability	Amount
Reserve	45	Deposit	450
Loan	420	Loans	15
Total	465	Total	465

2. Increase the deposits (increasing both deposits and reserves by the same amount) from new or existing client

Asset	Amount	Liability	Amount
Reserve	50	Deposit	470
Loan	420
Total	470	Total	470

3. Recall the loan amount

Asset	Amount	Liability	Amount
Reserve	45	Deposit	450
Loan	405
Total	450	Total	450