The average daily net transaction accounts balance of a local bank during the most recent reserve computation period is $325 million. The amount of average daily reserves at the Fed during the reserve maintenance period is $22.6 million and the average daily vault cash corresponding to the computation period is $4.3 million.
1. What is the average daily reserve balance required to be held by the bank during the maintenance period?
2. Is the bank in compliance with the reserve requirements?
3. What amount of reserves can be carried over to the next maintenance period either as excess or as shortfall?
4. If the local bank has an opportunity cost of 6 percent and deposits at the Fed pay 0.5 percent, what is the effect on the income statement from this reserve period?

Answer:

a) $19.159 million

b) Yes, bank compliance with reserve requirements.

c) 0.938 million

d) $2536.11 million

Explanation:

The amount that is being put apart from the profit for a suitable and relevant purpose is known as Reserve. It is used to usually offset debts and the purchase of fixed assets.

Reserve requirement can be determined as follows:

Daily avg reserve required= Daily avg. net transaction accounts × reserve %

= (0% × $16 million) +(($122.3 million - $16 million)

= 0 + $3.189 million + $20.27 million

= $23.459 million

∴

The avg. daily reserve for the maintenance period = Daily avg reserve required - Avg daily balance of cash.

= ($23.459 -$4.3) million

= $19.159 million

b) SInce the amount of avg daily reserve in the bank($21.2 million) is higher than the required amount of $2.04 i.e. $(21.2 - 19.16)

Then, we can agree that:

Yes, bank compliance with reserve requirements.

c). For the next maintenance period, the reserve carried over = reserve bank required to maintain × highest percentage

= $23.459 million × 4%

= 0.938 million

d)  

Since an amount of (2.04 - $0.938) million possess an opportunity cost & no earning at 6%;

Then, the effect of the loss is

[tex]\$1.102 \times 0.06 \times \dfrac{14}{365} \\ \\ =\$2536.11 \ million[/tex] from the reserver period.

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