Question

Please consider the following scenario for the Bank of Pizza and Beer. Assuming that total assets equal total liabilities, the bank's only liabilities are $15 Million in checkable deposits. The bank currently meets its reserve requirement, and it holds no excess reserves. The required reserve ratio is 10 percent. Assuming that its only assets are legal reserves, loans, and securities, what is the value of loans and securities held by the bank? Please explain and show any calculations.  

Answer 1

Answer 2

Given:

• Total Liabilities (Checkable Deposits) = $15 Million

• Required Reserve Ratio (RRR) = 10%

• Total Assets = Total Liabilities (as per accounting identity)

• Assets consist of: Legal Reserves, Loans, and Securities

• The bank meets reserve requirements and holds no excess reserves.

• 
  

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Step 1: Calculate Required Reserves

The bank must hold reserves equal to 10% of its checkable deposits:

$$\text{Required Reserves}=\text{Checkable Deposits}\times \text{Reserve Ratio}=15\text{M}\times 0.10=1.5\text{Million}$$

Step 2: Determine Total Assets

Since Total Assets = Total Liabilities, the bank's total assets are also $15 Million.

Step 3: Find Loans + Securities

The bank's assets consist of:

• Legal Reserves (Required Reserves) = $1.5 Million

• Loans + Securities = Remaining assets

• 
  

$$\text{Loans + Securities}=\text{Total Assets}-\text{Legal Reserves}=15\text{M}-1.5\text{M}=13.5\text{Million}$$

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Answer:

The value of loans and securities held by the bank is $13.5 Million