Question

If a bank experiences a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, which balance sheet would the bank rather have initially: Balance sheet A or balance sheet B? Why? Balance Sheet A Assets Liabilities Reserves $75 million Deposits $500 million Loans $525 million Capital $100 million Balance Sheet B Assets Liabilities Reserves $100 million Deposits $500 million Loans $500 million Capital $100 million

Answer 1

Balance Sheet B

Step-by-step explanation:

Given Data:

Balance Sheet A

Assets Liabilities

Reserves-- $75 million Deposits --$500 million

Loans-- $525 million Capital --$100 million

Balance Sheet B

Assets Liabilities

Reserves-- $100 million Deposits-- $500 million

Loans--- $500 million Capital-- $100 million

Representing each balance sheet as follows:

Balance Sheet A

Assets Amount Liabilities Amount

Reserves $75 million Deposits $500 million

Loans $525 million Capital $100 million

Total: $600 $600 million

Balance Sheet B

Assets Amount Liabilities Amount

Reserves $100 million Deposits $500 million

Loans $500 million Capital $100 million

Total: $600 million $600 million

When there is a deposit of $50 million, the bank would be better off with balance sheet B because it initially has a higher amount of reserves. An outflow of $50 million would reduce the amount of reserves by $50 million since the bank has to maintain certain amount of required reserves held as assets to meet this requirement.