Question
QUESTION 1 Your bank has the following balance sheet: Assets Liabilities Reserves $20 million Deposits $150 million Loans $140 million Bank capital $90 million Securities
QUESTION 1 Your bank has the following balance sheet: Assets Liabilities Reserves $20 million Deposits $150 million Loans $140 million Bank capital $90 million Securities $ 80 million The required reserve ratio is 5%. How much excess reserve is the bank holding? What action can the bank take to bring down the reserves to the required level? (4 marks) If a bank suffers a deposit outflow of $10 million, calculate the new reserve requirement, and does the bank meet the required reserve requirement? (4 marks) Show the new balance sheet to reflect the changes from part ii keeping in mind what the reserve requirement should be now. (4 marks) Explain the trade-off between Safety and returns to equity, when holding bank Capital.
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