4. The initial T-account of Sunshine Bank is as follows: Assets Liabilities Reserves $35 million Deposits...

4. The initial T-account of Sunshine Bank is as follows:

Assets		Liabilities
Reserves	$35 million	Deposits	$350 million
Loans	$315 million	Bank capital	$35 million
Securities	$35 million

Suppose that the required reserve ratio is 11%. If there is a deposit outflow of $35 million, Sunshine Bank will face a problem. What is the problem? What solutions could your provide to Sunshine Bank? Draw T-accounts to explain any three of your solutions in your own words.

Expert Solution

Before taking any actions, the bank’s balance sheet would be
Assets		Liabilities
Reserves	0 Million	Deposits	$315 million
Loans	$315 million	Bank capital	$35 million
Securities	$35 million
1)
Borrow $35 m. on the Federal Funds market in which case its balance sheet would be:
Assets		Liabilities
Reserves	35 Million	Deposits	$315 million
Loans	$315 million	Bank capital	$35 million
Securities	$35 million	Bank Borrowings	35 Million
2)
Borrow $35 m. from the Federal Reserve Discount Window in which case its balance sheet would be:

Assets		Liabilities
Reserves	35 Million	Deposits	$315 million
Loans	$315 million	Bank capital	$35 million
Securities	$35 million	Federal Resrve Borrowings	35 Million
3)
Sell $35 million of loans (or not renew $35 million of loans that come due at the same time of the deposit outflow
Assets		Liabilities
Reserves	35 Million	Deposits	$315 million
Loans	$280 million	Bank capital	$35 million
Securities	$35 million
4)
Sell $35 million of securities
Assets		Liabilities
Reserves	$35 million	Deposits	$315 million
Loans	$315 million	Bank capital	$35 million

All 4 choices involve a cost. Choices #1 and #2 raise the expenses of the bank and choices #3 and #4 reduce the bank’s revenues.

ekkarill92 answered 2 years ago

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