An FI funds a $5 million residential mortgage in 2012 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points.
-What amount of demand deposits are needed to fund the mortgage?

Question

Quizplus · Accepted Answer

To fund the $5 million mortgage, the FI needs to account for the reserve requirement. The reserve requirement is 10%, so the FI needs to hold $500,000 in reserves. Therefore, the total demand deposits needed are $5,000,000 / (1 - 0.10) = $5,555,555.

An FI Funds a $5 Million Residential Mortgage in 2012