Notes_Fractional_Reserve_Banking[1]

Notes_Fractional_Reserve_Banking[1] - Fractional Reserve...

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Unformatted text preview: Fractional Reserve Banking 1 Introduction to how banks make money and the value they add to society. You have a bunch of workers who save money or gold. There is a pool of savings. Now there is a pool of entrenpeurs. We have a problem. We have a bunch of people that already provided goods and services to the world and were paid gold or money. We have people who have ideas but no money. Someone starts a bank. They invest 1 million dollars and build a big vault. The equity is 1 million. They get the savers to store their 10 million dollars. Table 1: Bank Balance Sheet: How they make money Assets Liabilities Reserves 1 Deposits 10 Real Estate 1 Loans 9 Capital 1 Total 11 Total 11 Let us say Bank A charges 10% for loaning out money and they pay 4% to the depositors. Bank A makes 900k on the loans and pays out 400 thousand to depositors and pay 100 thousand for operating expenses. In the end the bank makes 400 grand. After taxes they have 300K. 2 Bank Balance Sheet and Income Statement How does the banks balance sheet change at the end of the year once the interest is collected and paid? What is the change in equity? It is 300k. What is the ROE? 300 k 1 , 000 k = 30% = NI Equity (1) 1 Table 2: Bank Income Statement: How they make money Variable Amount Interest Income 900k Interest Expense 400k Salaries 50k Upkeep 50k Pretax 400k Tax 100k Net Income 300k Table 3: Bank Balance Sheet: How they make money Assets Liabilities Reserves 1.3 Deposits 10 Real Estate 1 Loans 9 Capital 1.3 Total 11 Total 11.3 3 Fractional Reserve Banking Assume Bank A puts 10 dollars to buy real estate to start a bank. They get a deposit of 100 dollars and have a 10% reserve requirement. They make a loan to build a farm. Table 4: Bank A: Build Farm Assets Liabilities Reserves 10 Deposits 100 Loans 90 RE 10 Capital 10 Assume Bank B puts 10 dollars to buy real estate to start a bank. They get a deposit of 90 dollars and have a 10% reserve requirement. They make a loan to build a faculty. Assume Bank C puts 10 dollars to buy real estate to start a bank. They get a deposit of 81 dollars and have a 10% reserve requirement. They make a loan to build cars. 2 Table 5: Bank B: Build a Factory Assets Liabilities Reserves 9 Deposits 90 Loans 81 RE 10 Capital 10 Table 6: Bank C Assets Liabilities Reserves 8.10 Deposits 81 Loans 72.90 RE 10 Capital 10 M0= how much actual money or gold in the banking system= 100 gold pieces. M1=How much money do they think they have in terms of their checking account. 100+90+81=271. People think there is 271 gold pieces or money? Are they correct? Does it represent real weath? Yes, but only if these investments were real investments and generate future wealth then it is a real asset. There are not 271 gold pieces in this world, there are only 100 pieces of gold. The investments have to be real investments and generate real economic production such as a factory....
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This note was uploaded on 09/13/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Notes_Fractional_Reserve_Banking[1] - Fractional Reserve...

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