Two bank branches are asked in month 0 to reduce their cash holding ratios and the effort will be reviewed after 1 month by the director of the bank (responsible for branch 1 and branch 2). The bank director is wondering why branch 2 is reporting cash reduction of 60 while headquarters only report cash reduction of 57 in their total report for branch 1 and branch 2. What is the issue?
| Balance sheet Branch 1 | Month 0 | Month 1 |
|---|---|---|
| Total Assets | 50 | 50 |
| Cash Deposits | 20 | 20 |
| Cash Ratio | 40% | 40% |
Branch 1 reports 0 change in cash ratio and that no cash reduction took place (40% in y0 and 40% in y1)
| Balance sheet Branch 2 | Month 0 | Month 1 |
|---|---|---|
| Total Assets | 50 | 60 |
| Cash Deposits | 50 | 0 |
| Cash Ratio | 100% | 0% |
Branch 2 reports 100% change in cash ratio and argues that 60 of cash has been reduced (100% - 0% = 100% x 60)
| Balance sheet Total | Month 0 | Month 1 |
|---|---|---|
| Total Assets | 100 | 110 |
| Cash Deposits | 70 | 20 |
| Cash Ratio | 70.0% | 18.2% |
Headquarters reports cash ratio reduction of 51.8%ppt (70% - 18.2%) and argues that 57 of cash has been reduced (51.8% x 110)
Here a more compact overview of the tables above: spreadsheet view of tables above
