Question

QUESTION 2:

Your bank has the following balance sheet (Unit: million). The required reserve ratio is 10%.

Liabilities+Capital Deposits: $200 Borrowings: $0 Capital: $20 Assets Reserves: $50 Securities: $50 Loans: $120

To fill in the following tables, instead of using a positive or negative sign to indicate changes in the item, you need to write down the value for items in each cell.

(A) Update the balance sheet if there is an unexpected deposit outflow of $50 million.

(B) How much more reserves this bank needs to meet the requirement?

(C) Write down all possible actions the bank manager could take to rectify the situation.

(D) Write down the cost of each action you listed above.

(E) Suppose $30 of securities become worthless for this bank. Based on the balance sheet in part (A), update the balance sheet after $30 of securities becoming worthless.

(F) Will this bank become insolvent? Why?

Answer 1

SOLUTION A :

UPDATE BALANCE SHEET IF DEPOSIT OUTFLOW OF $50 MILLIONS.

ASSETS LIABILITIES+CAPTAL

RESERVES $50 DEPOSITS    $150

SECURITIES $50 BORROWINGS 0

LOANS    $70 CAPITAL    $ 20

TOTAL    &170    TOTAL $170

SOLUTION B

BANK REQUIRES ADDITIONAL $50 MILLIONS

SOLUTION C & D

POSSIBLE ACTIONS BANK MANAGER COULD TAKE:

1. BORROW FROM THE APEX CENTRALBANK >> COST WOULD BE 50MILLION

2.BORROW FROM OTHER BANKS    >> COST WOULD BE 50 MILLIONS

3. INCREASE INTEREST RATE ON LOANS GIVEN >> COST WOULD BE 50 MILLIONS

SOLUTION E >> $30 MIO SECURITIES BECOME WORTHLESS

RESERVES 50 DEPOSITS 120

SECURITIES 20 BORROWINGS 0

LOANS 70 CAPITAL    20

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TOTAL    140    TOTAL 140

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SOLUTION F :

YES HE BANK WILL GET INSOLVENT SINCE CAPITAL IS GETTING WIPED OFF.