Question

Freedom Cheney Bank started its first day of operations with $10 million in capital. A total of $100

million in checkable deposits is received. The bank makes a $20 million commercial loan and lends

another $30 million in mortgage loans. If required reserves are 5%, what does the bank balance sheet look

like?

Answer 1

Required reserves ($M) = Checkable deposit x Reserve ratio = 100 x 5% = 5

Excess reserves before loans ($M) = Checkable deposit - Required reserves = 100 - 5 = 95

Excess reserves before loans ($M) = Checkable deposit - Required reserves - Total loan = 95 - 20 - 30 = 45

Balance sheet as follows.

ASSETS	$M	Liabilities and Equity	$M
Reserves:		Checkable deposits	100
Required reserves	5	Capital	10
Excess reserves	45
Total reserves	50
Loans:
Commercial loan	20
Mortgage loan	30
Total loans	50
Other assets	10
TOTAL	110	TOTAL	110