A bank has the following balance sheet for 2020. Also shown are the respective interest rates:

Assets	Amount ($MM)	Rate, %
Business Loans	50	6
Corporate Bonds	26	5
Government Bonds	18	2.5
Cash	7
Real Assets	2

Liabilities	Amount ($MM)	Rate (%)
Demand Deposits	36	0
Time Deposits	45	1.1
Inter-Bank Borrowing	16	1.25
Preferred Equity	1
Common Equity	5

Off-Balance Sheet Item

Of the business loans above, $10MM was drawn from a $35MM Credit Line. That is, assume the average amount of the Line drawn during the year is $10MM. The bank charges 0.25% for unused lines of credit.

I               Assume reserve requirements are 3% for demand deposits, 0% for time deposits. How much excess reserves does the bank have?

II             Suppose capital requirements are:

8% for loans

% for bonds with risk of default

4% for inter-bank lending

2.5% for undrawn credit lines

Answer rating: 100% (QA)

I To calculate the excess reserves we first need to determine the required reserves Reserve requirements are only applicable to demand deposits Therefore the required reserves for demand deposits can ... View the full answer