a financial intermediary—connects money from savers to people who need to borrow it. financial...
Post on 21-Dec-2015
216 views
TRANSCRIPT
THE BANKING SYSTEM
WHAT IS A BANK?
WHAT IS A BANK?
A FINANCIAL INTERMEDIARY—connects money from savers to people who need to borrow it.
Financial intermediaries include many types of institutions—some are banks, some are notEx., insurance companies, pension funds,
money market funds, finance companies all collect money and then channel it into other investments
Banks are regulated by the Fed. Deposits insured up to $250,000
WHAT DO BANKS DO?
Serving Households• Safe place for deposits (checking or savings)• Can earn interest from bank on savings
account• Household can get car and home mortgage
loans from bank
Serving Businesses• Business Deposits and Loans• Payroll money, international transactions,
dividend payments to stockholders, loans for capital equipment
Other Activities• Buying and selling securities• Main source of our economy’s creation of new
money
HOW DOES THE FED AFFECT THE MONEY SUPPLY THROUGH COMMERCIAL BANKS?
The Fed
Changes in Reserve
Requirements
The Discount RateBuying and Selling Securities
AFFECTING THE MONEY SUPPLY Changes in Reserve Requirements—
additional dollars entering the banking system or leaving it
Discount Rate—influences how much money the banks will make available to the public and at what price
Buying and Selling Securities—additional dollars entering banking system or leaving it
THE FED CREATES MONEY…
OUR EXPLODING MONEY SUPPLY
Annual percentage change in the monetary base—January 1, 1961 to April 1, 2009—Wall Street Journal, June 11, 2009
BALANCE SHEET ITEMS
Assets
Balance sheet “plusses.”
For a bank the loans it makes are assets.
Liabilities
Balance sheet “minuses,”
Deposits are liabilities
They really belong to the people who put them there.
OTHER DEFINITIONS
Required Reserves—dollars the Fed says a bank must HOLD aside for each deposit. They are assets
Excess—these additional dollars (above required reserves) can be used for loans or other profit-generating activities. They are also assets.
Demand Deposits—people’s savings and checking accounts. A bank must keep a certain portion on reserve. The remainder becomes excess reserves that can be used for profit generating activities such as loans. These are liabilities.
Balance Sheet
An accounting tool that states the financial position of the business.
One side shows assets and the other side shows liabilities.
HOW MUCH NEW MONEY WAS CREATED IN TOTAL?
Follow the original demand deposit until it dwindles down to nothing
New checking accounts +
New savings accounts +
Other demand deposits
OR
LEAKAGE
THE FED CANNOT PREDICT THE RESULTS
OF ITS POLICIES!
• Cannot force people or businesses to take out loans…OR…
• Someone may take out a loan and it may not get deposited in another bank.
• Because of Leakage the maximum amount of new money may not be created.