Question

SECTION C Answer BOTH questions 29. Examine the simplified balance sheet below of a bank Suppose the required cash reserve ratio is 5% Does this balance sheet satisfy this requirement? If not, explain why and suggest ways of restoring the cash reserve ratio to the required level Units are omitted for simplicity Round to two decimal places, if needed Liabilities and Capital (Millions) Checkable deposits Time deposits Funds borrowed from interbank 100Market loans market Assets (Millions) 250 Reserves at the central bank10 50 Marketable securnties 90 100 tal 200 Advances/Loans 600 Total assets 400 600 Total liabilities and capital (10 Marks)

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Answer 1

Net demand and time liabilities	checkable deposits + time deposits	250+50	300
cash reserve requirement	5% of net demand and time liabilities	300*5%	15
so bank balance sheet is not fulfilling the requirement of cash reserve ratio as cash maintained with central bank is only 10 so it should be increased by 5 to maintain the CRR at a level of 5%
To meet the requirement of CRR bank may dispose off some of its marketable securities or can borrow from other banks