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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

Why might a bank be willing to borrow funds from other banks at a higher rate than the rate at which it can borrow from the Fed?

Suppose you are manager of a bank whose \(200million of assets have an average duration of five years and whose \)160 million liabilities have an average duration of seven years. Conduct a duration analysis for the bank and show what will happen to the net worth of the bank if interest rates fall by 1%. What will happen if the rates rise by 1%? When would the bank be better off?

Go to the St. Louis Federal Reserve FRED database, and find data for all commercial banks on total liabilities (TLBACBM027SBOG), total deposits (DPSACBM027SBOG), and residual of assets less liabilities (RALACBM027SBOG).

a. What is the balance sheet interpretation of the residual of assets less liabilities?

b. For the most recent month of data available, use the three indicators listed above to calculate the total amount of borrowings by banks.

Using the T-accounts of the First National Bank and the Second National Bank given in this chapter, describe what happens when Jane Brown writes a check for $90on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank.

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 “Quarterly Banking Profile,” select the most recent quarter and access QBP, click on “Complete QBP” and scroll to Table I-A.

a. Have banks’ 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?
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