A bank has the following assets: Reserves of $15 million; Loans of $150 million; and Securities of $50 million. Their liabilities include Deposits of $150 million; Borrowed funds of $35 million and Bank Capital of $30 million. If the required reserve rate is 10 percent, answer the following: What is the amount of excess reserves the bank is currently holding? What are the options available to the bank if customers decide to withdraw $10 million in deposits?
What will be an ideal response?
The bank is not holding any excess reserves. With deposits of $150 million and a required reserve rate of 10%, the reserves of $15 million are what the bank needs. If customers decide to withdraw $10 million from the bank the bank can meet this need either through asset adjustment or liability adjustment. First, from the asset side, the bank could sell securities for cash or decide not to renew some loans. Since the bank is interested in maintaining good customer relations, they would probably opt for the selling of securities. From the liability adjustment side, the bank could borrow the additional funds required or try to increase deposits, perhaps by offering an attractive interest rate on long-term CDs.
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What will be an ideal response?