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quantity of cash or outside money and directly affect a bank’s reserve position as well as
the amount of loans and deposits it can create without formally regulating the bank’s
portfolio. In practice, regulators have chosen to impose formal controls.15 In most countries, regulators commonly impose a minimum level of required cash reserves to be held
against deposits. Some argue that imposing such reserve requirements makes the control
13 The Federal Deposit Insurance corporation (FDIC) manages both the bank (BIF) and savings association (SAIF)
Also, a social cost rather than social benefit from regulation is the potential risk-increasing behavior (often
called moral hazard) that results if deposit insurance and other guaranty funds provide coverage to FIs and
their liability holders at less than the actuarially fair price (see Chapter 19 for further discussion).
In classic central banking theory, the quantity of bank deposits (D) is determined as the product of 1 over
the banking system’s required (or de...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09