Unit Four: Banks and the Creation of Money

Bank Balance Sheets

Notes 3/10/16

How do banks "create" money?

-By lending out deposits that are used multiple times

Where do the loans come from?

-Depositors who take cash and place it in the bank

How are the amounts of potential loans calculated?

-By using the bank balance sheet or T-account that consists of assets and liabilities for the bank

Bank Liabilities (Right Side of T-Account Sheet)

-Demand Deposits (DD) or Checkable Deposits (CD): Cash deposits from the public, They belong to the depositors, makes them liabilites

-Owners Equity: The value of stocks held by the public ownership of bank shares

Key Concepts:

-If DD comes from someone's cash holdings, then the DD's already part of the money supply, the cash is simply being placed in a bank account

- If DD comes in from the purchase of bonds (by the FED), then this creates new cash and therefore creates new money supply

Bank Assets (Left Side of T-Account Sheet)

-Required Reserves (RR)- Percentages of DD that must be held in the vault so that some depositors have access to the money, usually between 5-20%, In real time it will never be higher than 10%

-Excess Reserves (ER)- The source of new loans, DD= ER + RR

-Property 

-Securities/Bonds- Bonds purchased by the banks or new bonds sold to the bank by the Federal Reserve, These bonds can be purchased from the bank and turned into cash that immediately becomes available as ER

-Loans

*The FED requires banks to always have some money readily available to meet consumer's demand for cash

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