Consider the balance sheets of Bank A and Bank B. Suppose that reserve requirements are 10 percent of transaction deposits and both banks have equal access to the interbank market and funds from the Federal Reserve.

a. Which bank appears to face a greater liquidity risk?

b. Which bank appears to face a greater risk of insolvency? What other information might you use to assess the risk of insolvency of these banks?

Explain your answers.

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Bank A (in millions) Bank B (in millions) Assets Liabilities Assets Liabilities Reserves $ 50 Transaction deposits $200 Reserves $ 30 Transaction deposits $200 Loans $920 Nontransaction deposits $600 Loans $920 Nontransaction deposits $600 Securities $250 Borrowings $100 Securities $ 50 Borrowings $100