Question
Your bank has the following balance sheet: Assets Liabilities (unit in million) Reserves $50 Checkable deposits $200 Securities 50 Loans 150 Bank capital
Your bank has the following balance sheet:
Assets Liabilities (unit in million)
Reserves $50 Checkable deposits $200
Securities 50
Loans 150 Bank capital 50
b) If there is an unexpected deposit outflow of $50 million, what is the immediate effect on the balance sheet (fill in numbers in the blank)? Is there liquidity risk?
Assets Liabilities
Reserves $_____ Checkable deposits $________
Securities _____
Loans _____ Bank capital ____
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Balance Sheet Impact of Deposit Outflow Heres the impact of a 50 million deposit outflow on the banks balance sheet Before Outflow Assets million Liabilities million Reserves 50 Securities 50 Loans 150 Total 250 Checkable Deposits 200 Bank Capital 50 Total 250 After Outflow Assets million Liabilities million Reserves 50 50 outflow 0 Securities 50 Loans 150 Total 200 Checkable Deposits 200 50 outflow 150 Bank Capital 50 Total 200 Liquidity Risk Analysis Yes there is a liquidity risk in this scenario The banks reserves which are the most liquid assets are completely depleted after the 50 million deposit outflow This means the bank would be unable to meet immediate withdrawal demands from its customers without resorting to other measures such as selling securities which might take time and incur losses or borrowing from other banks which could be expensive Heres why Liquidity Risk Its the risk of a bank being unable to meet its shortterm financial obligations due to a lack of readily available cash or highly liquid assets Reserves These are highly liquid assets that banks hold to meet everyday customer withdrawal demands and other shortterm obligations In this situation the bank ...
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Foundations of Macroeconomics
Authors: Robin Bade, Michael Parkin
8th edition
134492005, 978-0134492001
