1. TOPIC 9
BANKING

2. Commercial Banks
Are privately owned profit seeking institutions whose main activities are to accept deposits and make loans
Eg : BCB , Maybank, Affin Bank.

3. Functions of Commercial Banks
Accept deposits
Make payments for customers
Receive payments for customers
Grant loans and advances
Make standing order payments
Credit transfers
Provide safe custody for valuable
Transact foreign business

4. = actual reserves – required reserves
The Creation of Money
Banks usually make loans up to the point where they can no longer do so because of the reserve requirement restriction (or up to the point where their excess reserves are zero).
excess reserves
= actual reserves – required reserves

5. The Creation of Money
When someone deposits $100 in a bank, and the bank deposits the $100 with the central bank, the bank has $100 in total reserves.
Balance Sheets of a Bank in a Single-Bank Economy
In Panel 2, there is an initial deposit of $100. In Panel 3, the bank has made loans of $400.
Panel 1
Panel 2
Panel 3
ASSETS
LIABILITIES
Reserves 0
0 Deposits
Reserves 100
100 Deposits
500 Deposits
Loans 400

6. The Creation of Money
If the required reserve ratio is 20%, the bank has excess reserves of $80. With $80 of excess reserves, the bank can have up to $400 of additional deposits. The $100 in reserves plus $400 in loans equal $500 in deposits.
Balance Sheets of a Bank in a Single-Bank Economy
In Panel 2, there is an initial deposit of $100. In Panel 3, the bank has made loans of $400.
Panel 1
Panel 2
Panel 3
ASSETS
LIABILITIES
Reserves 0
0 Deposits
Reserves 100
100 Deposits
500 Deposits
Loans 400

7. The Creation of Money The Creation of Money When There Are Many Banks
Panel 1
Panel 2
Panel 3
ASSETS
LIABILITIES
Reserves 100
100 Deposits
Reserves 100 Loans 80
180 Deposits
Reserves 20 Loans 80
Reserves 80
80 Deposits
Reserves 80 Loans 64
144 Deposits
Reserves 16 Loans 64
Reserves 64
64 Deposits
Deposits
Reserves 12.80
.00
500
Total
. . .
.20 51
Bank 4 64
Bank 3 80
Bank 2
100
Bank 1
Deposits
Summary:

8. The Money Multiplier
The money multiplier is the multiple by which deposits can increase for every dollar increase in reserves.
In the example above, the required reserve ratio is 20%. Each dollar increase in reserves could cause an increase in deposits of $5 when there is no leakage out of the system. An additional $100 of reserves result in additional deposits of $500.
.00
500
Total
. . .
.20 51
Bank 4 64
Bank 3 80
Bank 2
100
Bank 1
Deposits
Summary:

9. The Central Bank A bank that is owned and controlled by the government
It is not a profit institution and its main function is to control money supply in the economy

10. Functions of Central Bank
Issues coins and notes
Clearing interbank payments.
Acts as the lender of last resort
Acts as banker to the government
Operating government monetary policy
Regulating the banking system.
Assisting banks in a difficult financial position.
Managing exchange rates and the nation’s foreign exchange reserves.
Control of mergers between banks.
Examination of banks to ensure that they are financially sound.
Setting of reserve requirements for all financial institutions.

11. How the Federal Reserve Controls the Money Supply
Three tools are available to the Fed for changing the money supply:
changing the required reserve ratio;
changing the discount rate; and
engaging in open market operations.