The problem bank (Bank A or Bank B) must maintain a 10% required reserve ratio. Identify the bank that is in trouble from Question 8.

Now suppose the problem bank wanted to increase its reserves by borrowing from the Federal Reserve System. Use the balance sheet of the problem bank from the previous question toshow the adjustment in the balance sheet after the bank has borrowed from the Federal Reserve.

Question 8:

Consider two banks:

Bank A Balance Sheet

Assets Liabilities

Reserves $60 million Deposits $600 million

Loans $640 million Capital $100 million

Bank B Balance Sheet

Assets Liabilities

Reserves $90 million Deposits $600 million

Loans $610 million Capital $100 million

Assume the Required Reserve Ratio is 10% as mandated by the Fed. Both banks are free to keep required reserves in accordance with their respective bank policies.

If both banks suffer a $10 million deposit outflow, which bank is in a better shape now, Bank A or Bank B? Why? Explain your answer by showing and usingboth banks balance sheet after the deposit outflow.