Scenario 29-1

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the banks of Tazi hold $300 million of required reserves, $75 million of excess reserves, have issued $7,500 million of deposits, and hold $225 million of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.

Refer to Scenario 29-1. Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks?

Question

Scenario 29-1

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the banks of Tazi hold $300 million of required reserves, $75 million of excess reserves, have issued $7,500 million of deposits, and hold $225 million of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.

Refer to Scenario 29-1. Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks?

BlackTom AI · Accepted Answer

Assets = Liabilities + Equity is the key accounting identity governing a bank’s balance sheet. Banks’ assets here are reserves, Treasury bonds, and loans; the primary liability given is deposits. With the instruction that the only other asset is loans, we can solve for loans by balancing assets and liabilities.

1. Relevant concepts
- Bank assets: required reserves, excess reserves, loans, and securities (Treasury bonds).
- Bank liabilities: demand deposits (the only liability specified).
- If no other assets/liabilities are present, loans are the residual asset needed to make total assets equal total liabilities (ignoring capital/equity if not specified).

2. Step-by-step reasoning
- List the known asset components:
  - Required reserves = $300 million
  - Excess reserves = $75 million
  - Treasury bonds = $225 million
  - Loans = unknown (L)
- Total assets = 300 + 75 + 225 + L
- Known liability:
  - Deposits = $7,500 million
- Set Total assets = Total liabilities (deposits), so:
  300 + 75 + 225 + L = 7,500

3. Calculations (all intermediate steps)
- Sum the known assets: 300 + 75 + 225 = 600 (million)
- Solve for loans: 600 + L = 7,500
- L = 7,500 − 600
- L = 6,900 (million)

4. Why this is correct
Because deposits are the banks’ obligations and the listed reserves and bonds are part of assets, loans must equal the remaining asset amount needed to match the total deposit liabilities. Using the accounting identity yields the loans figure directly.

5. Why other common answers would be incorrect
- Omitting excess reserves (subtracting only required reserves) would understate total assets reserved and overstate loans.
- Forgetting Treasury bonds would similarly miscalculate the residual available for loans.
- Assuming equity without specification contradicts the problem’s instruction that loans are the only other asset.

6. Conclusion
Therefore, existing loans made by Tazian banks equal $6,900 million, which matches the provided correct answer.

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