Assume that the Union Bank & Trust has the following balance sheet items: • Rese
ID: 1191869 • Letter: A
Question
Assume that the Union Bank & Trust has the following balance sheet items:
• Reserves (R): $20 million• Securities Receivable (Sec Rec): $15 million• Loans Receivable (L Rec): $200 million• Other Assets (OA): $15 million• Transactions Deposits (D): $180 million• Nontransactions Deposits (ND): $60 million
a. If Equity Capital is the only item I left o this list, then how much equity capital does the bank have?
b. What is the quantity of this bank’s excess reserves?
c. If this bank is intentionally holding excess reserves, why would it do so? What risk are they trying to avoid?
d. Write out a T-account for this bank. Be sure to:
• split the Reserves account into Required and Excess Reserves.• include the Equity Capital you just calculated• include totals at the bottom
e. If the quantity of currency in circulation is $5 million, then what is the value of the monetary base?
f. What is the value of the simple money multiplier?
g. What is the value of the M1 money multiplier?
h. If there is no money in money market mutual funds, what is the value of M2?
i. What is the M2 money multiplier?
j. If a dierent bank,the Cardwell Bank,is $1 million short of reserves,how can Union
Bank & Trust help them get their reserves up to the required level?
k. Write out the balance sheet changes for both Cardwell Bank and Union Bank &Trust to show this kind of transaction.
Explanation / Answer
(a)
Equity capital = Total assets - Total liabilities
= $(20 + 15 + 200 + 15) mllion - $(180 + 60) million
= $(250 - 240) million = $10 million
(b)
Splitting total reserves into required reserves and excess reserves is not possible unless the required reserve ratio is known. So the answer cannot be provided.
(c)
If the bank is intentioanlly holding excess reserves without lending it, in all likelihood it is trying to avoid a Bank Run (collective withdrawal of deposits by bank customers) such that it can use the excess reserves available as its immediate liquidity.
(d)
The T-account is as follows. As explained in part (c), we cannot break-up total reserves.
(e)
Monetary base = Total reserves at bank + Currency held by public
= $20 million + $5 million
= $25 million
NOTE: Out of 11 sub-parts, the first 5 sub-parts are answered.
T-ACCOUNT $Million $Million Reserves 20 Transactions Deposits 180 Securities Receivable 15 Non-Transactions Deposits 60 Loans Receivable 200 Other Assets 15 Equity Capital 10 TOTAL ASSETS 250 TOTAL LIABILITIES AND EQUITY 250