Question

Bank of BCP has total reserves of $40 million and current total checking deposit of $200 million. With a legal reserve requirement of10% of total checking accounts, what is the bank's legal reser
ves and excess? If the bank creates a new loan in the form of new checking account equal to its excess reserves and each check is deposited in another commercial bank, what can the banking system do in total maximum new checking. accounts (loans), given the simple bank multiplier?

Answer 1

For Bank BCP, based upon given facts ----

The Legal Reserve = 10 % of Total Checking Amounts = 10% of $200 million = $20 million

The Excess amount = Current reserve - Legal reserve = $40 million - $ 20 million = $ 20 million.

If this excess of $ 20 million is used to create a new Loan --- then using the same 10% Simple Banking Multiplier ---- Checking deposits of $20 X 100/10 = $200 million can be accepted.