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LectureNote8 - LECTURE EIGHT Banking and Management of...

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Unformatted text preview: LECTURE EIGHT Banking and Management of Financial Institutions ECONOMICS 209 Professor Kevin Huang Vanderbilt University 9-1 Banking and the Management of Financial Institutions We have seen means of direct finance We now study means of indirect finance Financial institutions as intermediaries in channeling funds from lenders (creditors) to borrowers (debtors) Banking is an important form of financial intermediaries 9-2 The Bank Balance Sheet Assets = Liabilities + Bank Capital Liabilities (sources of funds)checkable deposits and money market deposit accounts, savings accounts and CDs, borrowings, and bank capital Assets (uses of funds)reserves and cash items, securities, loans, and other assets 9-3 9-4 Basic BankingCash Deposit The opening of a checking account with a $100 bill adds $100 to the banks vault cash that leads to a $100 increase in the banks reserves, which is equal to the $100 increase in the banks checkable deposits First National Bank First National Bank Assets Liabilities Assets Liabilities Vault Cash +$100 Checkable deposits +$100 Reserves +$100 Checkable deposits +$100 9-5 Basic BankingCheck Deposit (the Fed Provides Check Processing Services) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves First National Bank Second National Bank Assets Liabilities Assets Liabilities Reserves +$100 Checkable deposits +$100 Reserves-$100 Checkable deposits-$100 +$100 Checkable deposits +$100 Cash items in process of collection Liabilities Assets First National Bank 9-6 Basic BankingMaking Profits Suppose that the required reserve ratio is 10% Asset transformationselling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics (with possibly higher returns) The bank borrows short and lends long to make profits First National Bank First National Bank Assets Liabilities Assets Liabilities Required reserves +$10 Checkable deposits +$100 Required reserves +$10 Checkable deposits +$100 Excess reserves +$90 Loans +$90 9-7 Bank Management Liquidity Managementkeep sufficient reserves to...
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LectureNote8 - LECTURE EIGHT Banking and Management of...

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