Question

With deposits of 100, capital of 50, reserves of 40 and securities of 110. Use a balance sheet to show three separate balance sheet alternatives a bank might consider when faced with a withdrawal of 50 when the required reserve ratio is 20%.

Answer 1

The given Balance sheet of the Bank will be as follows
Assets		Liabilities
Reserves	40	Deposits	100
Securities	110	Banks Capital	50
Now the Reserves ratio is 20% of the Deposits, which will be 100*20% =20
So the Banks balance sheet before taking any action(after setting aside the minimum reserve) will be as follows:
Assets		Liabilities
Reserves	20	Deposits	80
Securities	110	Banks Capital	50
Now bank has follwing courses of action
Alternative 1:-
Borrow $20 m on the Federal Funds market in which case balance sheet would be:
Assets		Liabilities
Reserves	40	Deposits	80
Securities	110	Bank Borrowings	20
		Banks Capital	50
Alternative 2:-
Borrow $20 m on the Federal Reserves Discount window in which case balance sheet would be:
Assets		Liabilities
Reserves	40	Deposits	80
Securities	110	Federal Reserves Borrowings	20
		Banks Capital	50
Alternative 3:-
Sell $20 m of Securities or not renew $20 m loan that come due at same time of deposit outflow
Assets		Liabilities
Reserves	40	Deposits	80
Securities	90	Banks Capital	50