Week_9_-_Banking_System__Monetary_Policy

Week_9_-_Banking_System__Monetary_Policy - 1 ECMA06 –...

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Unformatted text preview: 1 ECMA06 – Banking System and Monetary Policy Banking System and Monetary Policy Outline • Commercial bank vs. central bank. • The balance sheet of a commercial bank. • Discuss how the banking system generates money. • What is the monetary base? • Measures used by the central bank to affect money supply. • The link between monetary policy and the real side of the economy – a revisit. 2 Commerical Bank vs. Central Banks • There are two types of banks: commercial banks and central bank. Commercial Banks • Commercial banks are privately owned, profit-seeking institutions that provide a variety of financial services such as accepting deposits from customers and making loans and other investments. • In Canada, the banking industry is dominated by chartered banks. • Chartered banks in Canada include RBC, BMO, CIBC, TD- Canada Trust, and Scotiabank. • Chartered banks are subject to federal regulations and only until recently were required to hold reserves with the Bank of Canada against their deposit liabilities. • The required reserve requirement was eliminated in 1994 but chartered banks still hold “ voluntary ” reserves with the Bank of Canada. 3 ECMA06 – Banking System and Monetary Policy Central bank – the Bank of Canada (BOC) • The BOC was established in 1935 and became a crown corporation in 1938. • In practice, the operation of the BOC is independent of the Federal government (i.e., the government could not intervene into the operation of the BOC). • The BOC performs the following functions: 1) Print money & “in charge” of money supply. 2) Lender of last resort: The BOC acts as bankers’ bank. ⇒ If commercial banks need to borrow money to remain liquid, they can borrow from the BOC. ⇒ However, when commercial banks borrow from the BOC; the BOC will charge them interest. The interest rate that the BOC charged is called the bank rate . 3) Banker to the Canadian government : The BOC manages government banks accounts, foreign exchange reserves, and national debt. 4 The Balance Sheet of A Commerical Bank • The balance sheet of a (commercial) bank: Assets Liabilities Cash & reserves Demand deposits Loans Equity Note: • Cash & reserves – Cash held by the commercial bank. Commercial bank keeps sufficient cash on hand so that it is able to meet depositor’s day-to-day cash withdrawals. • Equity – The difference between bank’s assets and bank’s liabilities, i.e., Equity = Assets – Liabilities. 5 ECMA06 – Banking System and Monetary Policy The Reserve Ratio (rr) • The reserve ratio refers to the fraction of its deposits that a commercial bank holds as cash & reserves. rr = where, 1 > rr > 0....
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This note was uploaded on 12/21/2011 for the course ECONOMICS ECMA06 taught by Professor Dr.atamazaheri during the Spring '10 term at University of Toronto.

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Week_9_-_Banking_System__Monetary_Policy - 1 ECMA06 –...

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