Macroeconomics
Table 1: Example of a Commercial Bank’s T-account (Assets and Liabilities) Assets
Liabilities and Net Worth
Reserves
$10 million
Deposits
$60 million
Loans
$80 million
Net worth
$30 million
Total
$90 million
Total
$90 million
Notable: ● The net worth is what “balances” the T-account or balance sheet (differencebetweenassets and liabilities). ● When some item on the bank’s T-account changes, there must be at least one other change elsewhere to maintain balance . For example, if the bank’sreservesincreaseby$100,itsloans decrease by $100 (or any other fractional combination occurs to maintain balance). Reasons for Holding Reserves A bank run occurs when many depositors or customers, who have claims on a bank (deposits), simultaneouslyrequesttowithdrawtheirfunds.Thisimposesliquidityproblemsforbankswhomaynot always be ready to convert assets into cash. This is why itismandatoryforallbankstomaintaina minimum percentage out of their total deposits as cash or reserves at the Fed referred to as required reserves . This percentage is referred to asthe requiredreserveratio or reserverequirement (rr) . For instance, if the reserveratiois10%andabankhas$50millionindeposits,thebankmusthold$5 million as reserves at the Fed ($50 million × 0.1). If not provided with its fnal value, the reserve requirement is calculated as follows: × 100 ℎ Thedifferencebetweenthebank’sactualreservesandrequiredreservesisthe excessreserves .Inother words,excessreservesrepresenttheremainderofthedepositedmoneythatbanksarenotrequiredto keep on hand. Banks can make loans of the excess reserves or keep them in their vaults. Excess reserves = actual reserves − required reserves ⇒ Excess reserves = deposits − (deposits × rr) In the previous example, excess reserves are equal to $45 million ($50 million − $5 million). rr = This ratio is used to calculate the required reserves (the amount to be kept at the Fed) as follows: Required reserves = total deposits × reserve requirement (rr)
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