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Chapter 9: Q.3 (page 263)

Suppose your bank has the following balance sheet:

If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50million?

Short Answer

Expert verified

The bank will have a reserve deficiency of $15 million as a result of the deposit outflow.

Step by step solution

01

Content Introduction

A bank's monetary record is a depiction of its funds at one point on schedule, and addresses exercises like making advances to families, organizations and, taking stores. Assets, Liabilities and Equity are the three fundamental parts to a monetary record .

02

Content Explanation

Attempts might be made to get in the Federal Funds market, take out a markdown advance from the Federal Reserve, sell $15million of the protections the bank possesses, auction $15million of the protection the bank claims, or ultimately bring in $15million of advances or loans. Every one of the activities will be costly to the bank. The bank director should attempt to secure the assets with the most inexpensive technique.

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Most popular questions from this chapter

It is relatively easy to find up-to-date information on banks because of their extensive reporting requirements. Go to http://www2.fdic.gov/qbp/, where you will find summary data on financial institutions. This site is sponsored by the Federal Deposit Insurance Corporation. Click on 鈥淨uarterly Banking Profile,鈥� select the most recent quarter and access QBP, click on 鈥淐omplete QBP鈥� and scroll to Table I-A.

a. Have banks鈥� returns on assets been increasing or decreasing over the past few years?

b. Has the core capital been increasing, and how does it compare to the capital ratio reported in Table 1 of the text?

c. How many institutions are currently reporting to the FDIC?

If no decent lending opportunity arises in the economy, and the central bank pays an interest rate on reserves that is similar to other low-risk investments, do you think banks will be willing to hold large amounts of excess reserves?

If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don鈥檛 have any excess reserves to lend out? Why or why not? What options are available that will enable you to provide the funds your customer needs?

Suppose your bank has the following balance sheet:

What would happen to bank profits if the interest rates in the economy go down? What actions could you take to reduce the bank鈥檚 interest-rate risk?

If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?
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