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New banks require capital of $32M before starting operations. On Day 1, what does it's balance sheet look like? Before the bank makes a loan, it needs reserves to settle the transaction. Are those reserves coming from the initial 32M capital?

One explanation could be that yes - the capital is in the form of reserves. The way this could work is that on Day 1, the investors draw down deposit balances at other banks and transfer them to the denovo. The denovo receives reserves from those deposits, but instead of creating a deposit liability it would create equity capital. The result would be a reduction in aggregate banking sector deposits of 32M, as deposits of the investors are transformed into equity of the denovo; reserves in the system would be unchanged.

Under such a scenario, the day 1 balance sheet would look like this:

Assets Liabilities
+32M Reserves +32M Equity

This is surprisingly difficult to find answers to - so if you have a source please link it. I searched high and low for "denovo balance sheet" and came up empty. If you don't know the answer, do not tap dance around it with a half response trying to earn SO points. Sorry for the abrasiveness, but I have encountered quite a bit of this recently.

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2 Answers 2

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Reserves can be just simply bank's own cash. Bank's own bank account is not a liability of bank. Other peoples accounts are liability of bank, because when you open deposit account, it is treated as you borrowing money to the bank. But banks own cash is not its liability.

Owners just transfer 32M to bank's account, accountant records that money as a reserve which is bank's asset against equity. There is nothing more complicated going on there.

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  • $\begingroup$ Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on Economics Meta, or in Economics Chat. Comments continuing discussion may be removed. $\endgroup$
    – 1muflon1
    Commented Jul 30, 2023 at 21:58
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It doesn't appear that you're missing much; only thing to add might be to account for bank premises and IT infrastructure/systems as PP&E presumably paid for with a corresponding reduction in cash/reserves.

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  • $\begingroup$ Thanks - yes the example balance sheet is overly simplified. I'm just trying to understand if banks always start day 1 with reserves, where they come from, and how it impacts the overall banking sector. My assumption is that the 32M capitalization requirement means that they always start day1 with at least some amount in reserves (some of the capital could be notes, bonds, ppe etc.). Critically - that they start with reserves from the capital investment, which is not associated with deposits.. That is they don't have to attract deposits before being able to settle loans. $\endgroup$
    – Solaxun
    Commented Jul 29, 2023 at 21:05
  • $\begingroup$ Seems plausible that they can't solicit deposits until they meet the denovo capitalization requirement, but the answer to that might be buried in the regs somewhere. $\endgroup$
    – user68318
    Commented Jul 29, 2023 at 22:23

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