Question

A Bank has $100 million in capital, and $900 million of checkable deposit. The bank currently maintains a total reserve of $100 million dollars, $200 million in T-bills, and rest in loans. A new corporate customer opens a checkable deposit account, and deposit $100 million.

1a. Please show the T-Account of the bank after the deposit?

1b. If the required reserve ratio is 10%, what is likely to happen?

Answer 1

1a.

Since there is an additional deposit, the total checkable deposit would be ($900 + $100 =) $1,000 million.

Total reserve = (100 / 900) × 1,000 = $111 million rounded.

Loan amount = (Checkable deposit + Capital) – (total reserve + T-bill)

                        = (1,000 + 100) – (111 + 200)

                        = 1,100 – 311

                        = $789 million.

T-account is as below (figures are in million):

Assets	Liabilities
Total reserve                                          $111	Checkable deposit                                $1,000
T-bill                                                      $200
Loan                                                       $789	Capital                                                    $100
Total assets                                         $1,100	Total liabilities                                      $1,100

1b.

Since required reserve is 10%, the amount is now ($1,000 × 10% =) $100 million.

The difference between total reserve and required reserve could be provided as loan.

Additional loan = Total reserve – Required reserve = 111 – 100 = $11 million.

T-account is as below (figures are in million):

Assets	Liabilities
Required reserve                                    $100	Checkable deposit                                $1,000
T-bill                                                      $200
Loan                                                       $800	Capital                                                    $100
Total assets                                         $1,100	Total liabilities                                      $1,100