1. Money Creation Prepared & Presented by Dr. Adel Anwar

2. Required reserve ratio ملاحظة : جزء كبير من أرباح البنوك التجارية هو فرق أسعار الفائدة على القروض عن أسعار الفائدة على الودائع. إذن من صالح البنوك التجارية إقراض أكبر قدر من حجم الودائع لديها. لتنظيم هذه العملية بما يحافظ على حقوق المودعين، يقوم البنك المركزي بفرض ما يعرف بنسبة الاحتياطى القانوني. (Required reserve ratio) Required reserve ratio (RRR): percentage of deposits that is required by the central bank to keep as reserves. نسبة الاحتياطي القانوني : نسبة يفرضها البنك المركزي على البنوك التجارية يحتفظ بها من كل وديعة كاحتياطى.

3. Example: if RRR=10%, of an initial deposit = KD100 Required reserves = 100 * 10% =10 ( الاحتياطى القانوني ) Excess reserves = 100 -10 = 90 ( الاحتياطى الفائض ) Note: If the bank was able to lend KD 60 of its excess reserves, what is the total reserve this bank has ? Total Reserve = Required reserves + Excess reserves (الاحتياطى الفائض) ( الاحتياطى القانوني) ( الاحتياطى الكلي ) = 10 + 30 = 40

4. Money creation is based on the process of deposits & loans and the RRR. To explain this process we assume: 1- All Commercial Banks will apply the RRR 2- All banks will lend their excess reserves 3- No currency leakage out of the banking system Money Creation لشرح عملية خلق النقود نفترض: التزام البنوك التجارية بنسبة الاحتياطى القانوني، وقيام البنوك بإقراض جميع الفوائض النقدية لديها، وعدم وجود أي تسرب من الجهاز المصرفي

5. 100 10 90 1000 100A 90B Required Reserves Excess Reserve DepositsBank 900 6.5665.61E 59.05 7.2972.9D 65.61 8.181C 72.9 9 81 Example: RRR= 10%, an initial deposit = KD 100

6. Money Multiplier (Deposit expansion multiplier): (مضاعف النقود / مضاعف الائتمان) M m = 1 RRR The multiplier: maximum possible change in total deposits out of any new deposit created by a multi-bank system. Potential money creation = initial deposit x M m

7. Q: What will happen to the effect M m when : A: there is a leakage (money drain) from the banking system? B: Banks were not able to lend all their excess reserves? C: Banks fail to apply the RRR?

8. Example1: IF RRR= 20%, and an initial deposit = KD 7000 was deposited at Alnoor Bank. What is the maximum Value of loans can this bank lend ? What is the maximum value of loans can the banking system create out of this deposit ? 1400 5600 7000Alnoor Required Reserves Excess Reserve Deposits Since M m = 1/20% = 5 Total loans (by the banking system) = 5600 x 5 = 28000 Answer :

9. Example2: IF RRR= 10%, and a commercial bank has deposits = KD 50,000 and total reserves = KD 7000 What is the value of excess reserves this bank has ? Required reserves = deposit x RRR = 50,000 x (10/100) = 5000 Excess reserves = Total reserves - Required reserves = 7000 – 5000 = 2000 Answer :

10. Third: Central Bank Functions of the Central Bank 1- Issuing the national currency 2- Banker’s Bank (maintain cash deposits, reserves, transferring funds and checks between banks, imposes regulations on banks, lender of last resort). 4- Implementing monetary policy (through monitoring and controlling money supply) 3- Government bank (handling payroll accounts, financial consultant & representative)