Financial Institutions Management: A Risk Management Approach 10th Edition by Anthony Saunders Solu
With the change, discount window loans to healthy banks would be priced at 1 percent above the fed funds rate rather than below as it generally was in the period preceding January 2003. Loans to troubled banks would cost 1.5 percent above the fed funds rate. The changes were not intended to change the Fed’s use of the discount window to implement monetary policy, but significantly increase the discount rate while making it easier to get a discount window loan. By increasing banks= use of the discount window as a source of funding, the Fed hopes to reduce volatility in the fed funds market as well. The change also allows healthy banks to borrow from the Fed regardless of the availability of private funds. Previously, the Fed required borrowers to prove they could not get funds from the private sector, which put a stigma on discount window borrowing. With the changes, the Fed will lend to all banks, but the subsidy of below fed fund rate borrowing will be gone.
37. Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits.
a. Suppose the Federal Reserve decreases the reserve requirement to 8 percent. Show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans, and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.
a. Panel A: Initial Balance Sheets
Federal Reserve Bank
Assets Liabilities
Securities $60m Reserve accounts $60m
---------------------------------------------------------------------------------------------
Bank Three
Assets Liabilities
Loans $540m Transaction deposits $600m
Reserve deposits 60m