Question

Of the following, which would be the last choice for a bank facing a reserve deficiency?

A) Call in loans.

B) Borrow from the central bank.

C) Sell securities.

D) Borrow from other banks.

Answer: A

Why the answer is A but not B?

Answer 1

Answer- A- call in loans

Reason- Call in loans means that the lender may force the borrower to pay anytime. So this call in loans are used for only short period of time only.

It may be called by the lending bank at any time. Call loans are collateralized using securities, and interest accrues on a daily basis at an unsecured adjustable rate.

• Why the answer is a but not b?

Reason- Commercial banks usually keep funds in the bank's account with the central bank. Such funds are usually counted as part of the bank's reserves some central banks pay interest on these deposits while others do not.

Bank reserves are essentially an antidote to panic. The Federal Reserve obliges banks to hold a certain amount of cash in reserve so that they never run short.

Usually when bank faces reserve deficiency it ask money from other banks and gives him back as per the asked interest but in the worst case it can only go for the call in loan so that in present bank can solve the problem in order to run the bank.

But as per the question call in loan is the last option because here the bank have its additional risk of lender's call for giving the money back in anyway.

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