The bank you own has the following balance sheet:Assets LiabilitiesReserves $75 million Deposits $500 millionLoans $525 million Bank capital $100 millionIf the bank suffers a deposit outflow of $50 million with a required reserve ratio ondeposits of 10%, what actions should you take?
Question
The bank you own has the following balance sheet:Assets LiabilitiesReserves 500 millionLoans 100 millionIf the bank suffers a deposit outflow of $50 million with a required reserve ratio ondeposits of 10%, what actions should you take?
Solution
First, let's understand the current situation. The bank has 525 million in loans, 100 million in bank capital. The total assets (525 million) equal the total liabilities (100 million), which means the bank is currently balanced.
Now, let's consider the deposit outflow of 450 million (50 million).
The required reserve ratio is 10%, which means that the bank needs to keep 10% of its total deposits as reserves. So, after the deposit outflow, the required reserves will be 450 million * 10%).
Currently, the bank has 30 million in reserves (45 million), which is more than the required amount.
However, the bank's total liabilities will decrease because of the deposit outflow. The new total liabilities will be 450 million in deposits + $100 million in bank capital).
To balance the bank's books, the total assets also need to decrease to 50 million (550 million).
In conclusion, to handle the deposit outflow of 50 million. This will keep the bank's balance sheet balanced while still meeting the required reserve ratio.
Similar Questions
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