Financial Markets and Institutions (2-downloads)

First National Bank

Second National Bank

Assets

Liabilities

Assets

Liabilities

Reserves

+$100

Checkable

deposits

+$100

Reserves

–$100

Checkable

deposits

–$100

First National Bank

Assets

Liabilities

Required reserves

+$10

Checkable deposits

+$100

Excess reserves

+$90

entered in the T-account as $100 of cash items in process of collection because the

First National Bank will now try to collect the funds that it is owed. It could go directly

to the Second National Bank and ask for payment of the funds, but if the two banks

are in separate states, that would be a time-consuming and costly process. Instead,

the First National Bank deposits the check in its account at the Fed, and the Fed col-

lects the funds from the Second National Bank. The result is that the Fed transfers

$100 of reserves from the Second National Bank to the First National Bank, and the

final balance sheet positions of the two banks are as follows:

The process initiated by Jane Brown can be summarized as follows: When a check

written on an account at one bank is deposited in another, the bank receiving the

deposit gains reserves equal to the amount of the check, while the bank on which the

check is written sees its reserves fall by the same amount. Therefore, when a bank