Final answer:
To address a reserve shortfall, banks may borrow funds, call in loans, or issue new debt, among other measures. An increase in required reserves means banks must adjust their balance sheet, often resulting in decreased lending capacity. Excess reserves are a precautionary measure for banks, especially during economic uncertainty.
Step-by-step explanation:
When a bank finds that its required reserves exceed its actual reserves, it faces a shortfall and must take action to comply with the mandated reserve requirement. In such a scenario, banks have several options to make up for the deficit in reserves. They might raise funds by calling in loans, borrowing from other banks or the central bank, issuing new debt or equity, or reducing assets. During times of economic uncertainty, banks may also increase their reserve ratios as a precautionary measure, anticipating higher default risks and possible bank runs which could demand higher liquidity levels.
If banks were notified they had to increase their required reserves by one percentage point, this would require them to hold a higher fraction of their deposits as reserves, effectively reducing the amount of money available for lending. The bank would need to adjust its balance sheet to comply with the new reserve requirement by performing actions similar to those taken when actual reserves fall short of required reserves.
In summary, banks hold excess reserves to manage liquidity risk and maintain confidence among depositors, especially during economic downturns when they forecast a higher risk of loan default and potential bank runs.