An analyst gathers the following information about Monument State Bank: Demand deposits: $400 million Loans and securities: $260 million Reserve requirement: 10% The bank has total $50 million in cash and deposits with the Federal Reserv. Monyment State Bank is in a position to make additional loans of: a. $5 million b. $10 million c. $26 million d. $40 million Answer is b. $10 million. Explanation is: $400MM x 10% = $40MM reserve requirement. $50MM are in reserve, so $50MM-$40MM = $10MM can be loaned out. I don’t understand this. I thought that 10% reserve requirement means that the bank can lend/risk 90% of its demand deposits. I.E. the bank can risk $400MM x 90% = $360MM. The bank has already risked $260MM, which leaves $100MM. Plus there is the excess $10MM in cash and deposits at the Federal Reserve. So by my calculation the bank is in a position to lend an additional $110 million. Where did I go wrong here?
Check “Bank Reserve” posted by ReneL.
I just saw that, webtwister. Doesn’t really answer my Q though. I get that $50MM - $400M x 10% = $10MM. But what about the fact that $400MM assets x 90% loanable - $260MM loaned = $100MM loanable?
well the question doesn’t provide you with the whole picture… that is were the rest of the money 100 mil loanable-50 in cash at back=50 mil went but the thing is result is the same you have only 50 mil in cash so can not loan more than that…if you substract money at federal reserve you end up with 10
well the bank has 400 deposits… the reserve requirement means that the bank HAS to keep a minimum of 10% of these deposits with the Fed… so, the bank already has 50 recerved with the fed, therefore he can loan out 10 more…
Am sure the clue there is “additional loans”. $260m is there as loans, but how much more can the bank loan out, considerin all fact we have.