Refer to the previous problem. What would be the cost for this bank to comply with its
Question:
Refer to the previous problem. What would be the cost for this bank to comply with its required reserves if the bank decides to borrow from the Fed at a discount rate of 0.75%? Can you now explain why excess reserves serve as insurance against deposit outflows?
Data From previous Problem
Suppose a bank currently has $150,000 in deposits and $15,000 in reserves. The required reserve ratio is 10% (so this bank holds no excess reserves). If there is a deposit outflow (i.e., someone withdraws funds from her account) for $5,000, would this bank still comply with the Fed's requirement of keeping 10% of its deposits in the form of reserves? What would be the cost for this bank to comply with this regulation if the bank decides to borrow from another bank to eliminate its reserve shortage? Assume a federal funds rate of 0.25%.
Step by Step Answer:
Financial Markets And Institutions
ISBN: 9781292215006
9th Global Edition
Authors: Stanley Eakins Frederic Mishkin