Question

Beleaguered State Bank (BSB) holds $200,000,000 in deposits and maintains a reserve ratio of 10%, which also is the reserve requirement. On paper, write the T account for BSB and use it to answer the rest of this question. Now suppose that BSB's largest depositor withdraws $10,000,000 from her account one day. On paper, show the effect of this on the T account. How many dollars of cash reserves does BSB need to raise to be allowed to open for business the next morning?

Answer 1

Beleaguered State Bank (BSB) holds $200,000,000 in deposits and maintains a reserve ratio of 10%, which also is the reserve requirement. On paper, write the T account for BSB and use it to answer the rest of this question.

Assets		Liabilities
Reserve	20 million	Deposits	200 million
Loans	180 million

Now suppose that BSB's largest depositor withdraws $10,000,000 from her account one day. On paper, show the effect of this on the T account. How many dollars of cash reserves does BSB need to raise to be allowed to open for business the next morning?

Assets		Liabilities
Reserve	19 million	Deposits	190 million
Loans	171 million

Deposits will be now 190 million, so reserves required are 190 * 10 % = 19 million only whereas previously it was 20 million, so 1 million from that can be used to give as a loan.

But if company want to continue at 180 million loan amount , then amount to be raised is :-

180 - 171 - 1 = $ 8 million