Question

XYZ Bank has the following balance sheet (in $million):

                  Loans     100

                  Securities              25

Inter-bank Lending            0

                  Cash/Reserves     10

-        -

Demand Deposits               110

Bonds                                        20

Equity                                        ?

.   Here’s ABC Bank’s balance sheet (in $million):

                  Loans     2000

                  Securities              250

                  Cash/reserves      12

-        -

Demand Deposits               1000

Bonds                                        200

Inter-bank Borrowing      1040

Equity                                        ?

Return to the original balance sheets for ABC and XYZ. Suppose reserve requirements are 3% against deposits. What are total, required and excess reserves for XYZ and ABC?

XYZ lends $5 million to ABC in the federal funds market. Show their new balance sheets. What are the new total, required and excess reserves for XYZ and ABC? What are their new leverage ratios compared to question 2.

Show the new balance sheets for ABC and XYZ, as well XYZ’s and ABC’s new reserves positions on the Federal Reserve’s balance shee

Answer 1

For XYZ Ltd.,

Total Assets = (100+25+10) = 135

Total Liabilities = (110+20) = 130

Thus, Total Equity = (135-130) = 5

If the reserves requirement is 3%, then, total reserves = (10+3.3) = 13.3

Required = 3.3 more

Excess = 3.3

For ABC Ltd.,

Total Assets = (2000+250+12) = 2262

Total Liabilities = (1000+200+1040) = 2240

Thus, Total Equity = (2262-2240) = 22

If the reserves requirement is 3%, then, total reserves = (1000+30) = 1030

Required = 30 more

Excess = 30

When XYZ lends 5 million to ABC,

For XYZ Ltd.,

Total Assets = (100+25+10+5) = 140

Total Liabilities = (110+20) = 130

Thus, Total Equity = (135-130) = 10

If the reserves requirement is 3%, then, total reserves = (10+3.3) = 13.3

Required = 3.3 more

Excess = 3.3

For ABC Ltd.,

Total Assets = (2000+250+12) = 2262

Total Liabilities = (1000+200+1045) = 2245

Thus, Total Equity = (2262-2240) = 17

If the reserves requirement is 3%, then, total reserves = (1000+30) = 1030

Required = 30 more

Excess = 30