Monetary PolicyMonetary PolicyControlling the expansion and/or
contraction of the money supplyInfluences the cost and availability of credit
Fractional Bank ReservesBanks only keep a fraction of their deposits
as reservesLegal reserves – coins, currency, and deposits
that fulfill reserve requirementMember banks keep some reserves at Fed
district bankKnown as member bank reserves
Key Monetary TermsKey Monetary TermsLiabilities
debts and obligations to othersAssets
PropertiesPossessionsClaims on others
Balance sheet Condensed statement showing all assets and
liabilitiesNet worth
Excess assets over liabilities
How Banks OperateHow Banks OperateOrganizing a Bank
Obtain a charterBank has corporate structure
Investors help build assets
Balance SheetAssets –
Liabilities = Net Worth
Assets = Liabilities + Net Worth
Assets Liabilities
Required Reserves: Demand Deposits:
Cash:
Loans: Net Worth Equity: $20
Bonds:
Buildings and Furniture: $20
$20 $20
Accepting DepositsAccepting DepositsDeposits are reflected in two ways
1. liability to indicate asset is owed to depositor
2. asset to show cash is property of bank
Deposits are shown as asset and reserve
Assets Liabilities
Required Reserves: $10
Demand Deposits: $100
Cash: $90
Loans: Net Worth Equity: $20
Bonds:
Buildings and Furniture: $20
$120 $120
Making LoansMaking LoansBank is free to loan out excess reservesOnce loaned, that money moves to loans,
or accounts receivableBank makes income on interest charged
for loansUsed to pay billsThen generally
paid out as stock dividend
Assets Liabilities
Required Reserves: $10
Demand Deposits: $100
Cash:
Loans: $90
Net Worth Equity: $20
Bonds:
Buildings and Furniture: $20
$120 $120
Reaching MaturityReaching MaturityBank will grow and diversify assets and liabilities
Some banks buy bonds and securitiesEarn interestHigh degree of liquidity
Also offer certificate of deposit and savings accounts
Attempt to maintain a 2%-3% spread on loansEnsures the bank will make money
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