Banking+Balance+Sheets+and+the+Money+Supply+-+f11

Banking+Balance+Sheets+and+the+Money+Supply+-+f11 - The...

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The Banking System The Banking System and the and the Money Supply Money Supply
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T-Accounts T-Accounts Assets Liabilities New Worth A=L+NW ΔA = ΔL + ΔNW Assets Liabilities Net Worth A L+NW Eco 301 - Fall 2011 2 Nick Noble The Banking System and the Money Supply
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Banking System Balance Banking System Balance Sheets Sheets Assets Liabilities and New Worth Cash Items Deposits •Vault Cash •Transaction •Deposits at Fed •Non-Transaction Earning Assets Borrowings •Securities •From Banks •Loans •From Fed •Commercial •Other •Real Estate Other Liabilities •Consumer Net Worth •Interbank Other Assets Web Link Eco 301 - Fall 2011 3 Nick Noble The Banking System and the Money Supply
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Banking System Balance Banking System Balance Sheets Sheets Assets Liabilities and New Worth Reserves (Deposits at the Fed) Checkable Deposits (CD) Required Reserves Loans From Excess Reserves Banks Fed Loans and Securities Eco 301 - Fall 2011 4 Nick Noble The Banking System and the Money Supply
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Reserves Actual Reserves (RES) From the bank’s balance sheet Required Reserves (RR) Based upon deposits and the reserve requirement ratio – RR = CD * r CD Excess Reserves (ER) Reserves over and above required reserves • ER = RES – RR = RES - CD * r CD Data Eco 301 - Fall 2011 5 Nick Noble The Banking System and the Money Supply
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Excess Reserves Excess Reserves Eco 301 - Fall 2011 6 Nick Noble The Banking System and the Money Supply
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Excess Reserves Excess Reserves 59-08 59-08 Eco 301 - Fall 2011 7 Nick Noble The Banking System and the Money Supply
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Interest on Reserves Interest on Reserves The interest rate paid on required reserve balances is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy. Current Rate of Interest on both Required and Excess reserves is 0.25% Eco 301 - Fall 2011 8 Nick Noble The Banking System and the Money Supply
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Mechanics Mechanics Bank A A L+NW RES +100 CD +100 Deposit in Checking Account (Bank A) Res↑ CD ↑ Write Check (Bank B) Res ↓ CD ↓ Bank B A L+NW RES -100 CD -100 Eco 301 - Fall 2011 9 Nick Noble The Banking System and the Money Supply
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Mechanics Mechanics Bank B A L+NW RES 200 CD 2000 L&S 1800 after A L+NW RES 100 L&S 1800 CD 1900 Write Check (Bank B) – r CD = 10% (assume) RES=200 RR=200 ER=0 Write Check Bank B) after RES=100 RR=190 ER=-90 Eco 301 - Fall 2011 10 Nick Noble The Banking System and the Money Supply
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Mechanics Bank B A L+NW RES 100 L&S 1800 CD 1900 A L+NW RES 200 CD 1900 Since Bank B is short to reserves they can: Sell a security ($100) Note: This probably should have been sell a $90 security. What would be
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Banking+Balance+Sheets+and+the+Money+Supply+-+f11 - The...

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