Question

Bank A Balance Sheet

Assets                                      Liabilities                          

Reserves         $60 million      Deposits   $600 million

Loans           $640 million      Capital     $100 million

Bank B Balance Sheet

Assets                                      Liabilities                          

Reserves         $90 million      Deposits   $600 million

Loans           $610 million      Capital     $100 million

Assume the Required Reserve Ratio is 10% as mandated by the Fed. Both banks are free to keep required reserves in accordance with their respective bank policies.

If both banks suffer a $10 million deposit outflow, which bank is in a better shape now, Bank A or Bank B? Why? Explain your answer by showing and usingboth banks’ balance sheet after the deposit outflow.

Answer 1

Given balance sheet of Bank A

ASSETS		LIABILITIES
Reserves	60	Deposits	600
Loans	640	Capital	100
	700		700

Balance sheet of Bank B

ASSETS		LIABILITIES
Reserves	90	Deposits	600
Loans	610	Capital	100
	700		700

Reserve ratio = 10%

So both banks need to keep 10% of deposits as required reserves = 600 * 10% = 60 Million $

Bank A has Reserves of 60 Million $ which fulfil Require reserve ratio.

Bank B has Reserve of 90 Million $ which fulfil required reserves of 60 million $ as well as excess reserves of 30 Million $

Now, if both banks suffer outflow of 10 Million $, Bank A deposits will fall by 10 Million to 590 Million $. The Reserves will fall by 10 Million $. This will lead to shortfall in required reserves of Bank A by 10 Million $. The Bank A now need to borrow from interbank market to fulfil its reserve requirements of 10 Million $. The balance sheet will be.

ASSETS		LIABILITIES
Reserves	60	Deposits	590
		Interbank market	10
Loans	640	Capital	100
	700		700

Whereas Bank B deposits will fall by 10 Million to 590 Million $. The Reserves will fall by 10 Million $. The bank have excess reserves of 30 Million $, therefore it can pay outflow with excess reserves. The Bank B no need to borrow from interbank market to fulfil its reserve requirements. The balance sheet will be

ASSETS		LIABILITIES
Reserves	80	Deposits	590
Loans	610	Capital	100
	690		690