APMacro: Bank Balance Sheet


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All commercial banks and thrift institutions that provide checkable deposits must by law keep required reserves. Required reserves are an amount of funds equal to a specified percentage of the bank’s own deposit liabilities. A bank must keep these reserves on deposit with the Federal Reserve Bank in its district or as cash in the bank’s vault. This specified percentage of checkable deposit liabilities that a commercial bank must keep as reserves is known as the reserve ratio. 

Reserve ratio = bank reserves / total checkable deposit liabilities.

The Federal Reserve has the authority to establish and vary the reserve ratio within limits legislated by Congress.

3 Accepting Deposits
The bank receives $100,000 cash deposit from customers and businesses, which is an asset to the bank. This money is deposited in the bank as checkable deposits or checking account entries, rather than as savings accounts or time deposits. these newly created checkable deposits constitute claims that the depositors have against the assets of the bank and therefore are a new liability account. 

The reserve ratio for checkable deposits is 20 percent. By depositing $20,000 in the Federal Reserve, the bank will be meeting the required 20 percent ratio between its reserves and its own deposit liabilities. We use “reserves” to mean the funds commercial banks deposit in the Federal Reserve Banks, to distinguish those funds from the public’s deposits in commercial banks.

4 Depositing Reserves at the Fed
Suppose, instead of sending the minimum amount of  $20,000, the bank sends an extra $90,000 for a total of $110,000. A bank would not deposit all its cash in the Federal Reserve Bank. We’re doing it to simplify the problem, so we don’t need to bother adding two assets, “cash” and “deposits in the Federal Reserve Bank” to determine “reserves.”

A bank’s excess reserves are found by subtracting its required reserves from its actual reserves.

Excessive reserves = actual reserves – required reserves

 To compute the excess reserves, multiply the bank’s checkable deposit liabilities by the reserve ratio to obtain the required reserves ($100,000 x 20 % = 20,000). Subtract the required reserves from the actual reserves listed on the asset side of the bank balance sheet. In this case excess reserves = $110,000 – $20,000 = $90,000.

Assume that farmer Harvey deposited a substantial portion of the $100,000 the bank received in transaction 3. Suppose farmer Harvey buys $50,000 of farm machinery from Snarf Farming Equipment. Farmer Harvey pays for this machinery by writing a $50,000 check against his deposit in the bank. Harvey gives the check to Snarf. Snarf deposits the check into their bank. Whenever a check is drawn against one bank and deposited in another bank, collection of that check will reduce both the reserves and the checkable deposits of the bank on which the check is drawn. Conversely, if a bank receives a check drawn on another bank, the bank receiving the check will in the process of collecting it, have its reserves and checkable deposits increased by the amount of the check.

5 Clearing a Check
Harvey’s bank discovers that one of its depositors has drawn a check for $50,000 against his checkable deposit. The bank reduces checkable deposits by $50,000 and notes that the collection of this check caused a $50,000 decline in its reserves at the Federal Reserve Bank.


Homework:
1) Read Chapter 13 pp.245-254.  Answer questions #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, 13
2) Learnerator: Production Possibilities Curve #1-20, Inflation #1-30, Unemployment #1-30

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