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Unformatted text preview: Lesson 3 How Banks Work (Chapter 8) January 30, 2012 The Role of Banks- A bank is a financial intermediary that accepts deposits from savers and makes loans to borrowers- By making larger loans out of small deposits, banks provide liquidity for borrowers and lenders- Banks are adept at: o Pooling funds o Gathering information about borrowers Bank Balance Sheets- The profit motive guides the bank’s decisions regarding how much to lend and to whom Assets = Liabilities + Equity Capital- Assets primarily include reserves , securities, and loans the bank has made- Loans represent the asset generating the greatest profit- Liabilities include primarily savers’ deposits and borrowing on behalf of the bank Reserve Accounting- Banks manage funds by adjusting the size of their reserves- By law, banks are required to maintain a certain amount of reserves Reserves = vault cash + deposits at the Fed Excess Reserves- Banks often keep more reserves on hand than is necessary to meet their requirements- Excess reserves are the bank’s total reserves minus its required reserves- Excess reserves are used in four ways 1. Held by the bank, earning interest from the Fed 2. Lent in the federal funds market 3. Used to buy securities...
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This note was uploaded on 02/03/2012 for the course ECON 301 taught by Professor Hassan during the Spring '08 term at Rutgers.
- Spring '08