Question

Select all that apply

Which of the following are reasons that a real-world bank would not deposit all of its cash in the Federal Reserve Bank?
A. Banks must hold vault cash equal to 10% of their total assets.
B. By holding all their cash with the Federal Reserve, banks would be unable to meet a bank run or bank panic.
C. Banks as a rule keep 1.5% or 2% of their assets as cash in the vault.
D. Cash that banks retain in their vaults can be counted as reserves without sending it to the Federal Reserve.

Answer 1

Real-world banks do not deposit all of their cash in the Federal Reserve for several reasons. These include a requirement to hold vault cash equal to 10% of their total assets, the need to be able to meet a bank run or bank panic, and the practice of keeping a certain amount of cash in the vault for emergencies or operational needs.

Step-by-step explanation:

The Federal Reserve requires banks to keep a certain percentage of depositors' money on reserve, which can be either in their vaults or at the Federal Reserve Bank. There are several reasons why a real-world bank would not deposit all of its cash in the Federal Reserve:

• Banks must hold vault cash equal to 10% of their total assets. This is a requirement set by the Federal Reserve to ensure that banks have enough cash on hand in case of a bank run or bank panic.
• By holding all their cash with the Federal Reserve, banks would be unable to meet a bank run or bank panic. If all the cash is held at the Federal Reserve, the bank would not have enough cash to give to depositors if there is a sudden increase in withdrawal demands.
• Banks as a rule keep 1.5% or 2% of their assets as cash in the vault. This is a common practice for banks to have a certain amount of reserves on hand in case of emergencies or to meet operational needs.

Cash that banks retain in their vaults is counted as reserves without sending it to the Federal Reserve.