Unformatted text preview: reserve funds maintained by the central bank can be useful in the event of an emergency. In their credit creation activity commercial banks go by the saving habits of their depositors. If the depositors are known to demand about 10 percent of their total amount deposited then the remaining 90 percent of the amount is available for credit creation and the issue of loans. For example, if the total deposit amount received by the banker is $10,000 then 10 percent of this is set aside. This is also the proportion of the reserve fund that is required to be maintained with the central bank. After maintaining a reserve of $1000 the remaining amount of $9000 can be issued as credit or advance . But the borrower of a banker is also its own depositor since bankers issue advances in the form of a fresh bank account in the name of the borrower. This explains the chief principle on which the banking activity is based. It can be stated as:...
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- Fall '10
- Fractional-reserve banking, Profit making activity