Final answer:
The depositor's balance needs to be adjusted for errors to reflect the true cash balance. Changes to Acme Bank's balance sheet would include reducing reserves and altering loans to maintain a 10% required reserve ratio after an open market sale. Banks factor in the possibility of loan defaults in their planning, and unexpected increases in defaults can drastically impact a bank's net worth.
Step-by-step explanation:
Errors made by the depositor require adjustments to the depositor's balance to arrive at the true cash balance. For example, suppose the Federal Reserve (Fed) conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. If Acme Bank's initial balance sheet includes assets – reserves $30 million, bonds $50 million, and loans $250 million; and liabilities – deposits $300 million and equity $30 million, changes will need to be made to restore its required reserves at 10% of deposits by reducing its loans.
After the sale, Acme Bank's reserves decrease by $10 million, now standing at $20 million, and bonds held increase to $60 million. To maintain the required reserves ratio, Acme will adjust its balance sheet, particularly its loans. If the bank reduces its loans to cover the required reserves, that means loans might decrease by an amount that would restore the reserves ratio to 10% of the deposits. Considering the reduced reserves, loans would need to decrease by $10 million to keep the reserves at the required level.
A well-run bank factors in the possibility of loan defaults when calculating its annual expenses and assessing the value of its loans on the balance sheet. Significant deviations from the expected rate can impact a bank's net worth drastically, as demonstrated by the hypothetical situation where Safe and Secure Bank's loan value decreased from $5 million to $3 million due to unexpected defaults, causing a reduction in assets and potential negative net worth.