ECON 1040 Ch 15
How did the lending power fall significantly in the Bank Panics of 1930-33
As people withdrew funds, the banks' reserves reduced
Why were receipts used as money in place of the gold they represented
Because goldsmiths became aware that most of the gold in their vaults was never claimed
Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $10,000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?
Checkable deposits = 100,000 + 10,000 = 110,000 Required reserves = 110,000 * 20% = 22,000 Actual Reserves = 20,000 + 10,000 Excess Reserves = 30,000 - 22,000 = 8,000
Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?
Checkable deposits = 100,000 + 5,000 = $105,000 Required reserves = 105,000 * 20% = $21,000 Excess reserves = actual reserves - required reserves = (20,000 + 5,000) -21,000 = 25,000 - 21,000 = $4,000 Excess reserves = 4,000
A bank's reserve ratio is 20%. What is it's monetary multiplier
Monetary multiplier = 1/required reserves ratio (R) = 1/.2 = .5
How many banks failed in the period of the bank panics of 1930-1933
OVER 9000!!!!!!!!!
13. Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank's actual reserves?
Required reserves = 20% * $150,000 = $30,000 Actual reserves = Required reserves + excess reserves = 30,000 + 8,000 = $38,000 Actual reserves = $38,000
Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $15,000 in securities to the Federal Reserve Bank in its district, receiving a $15,000 increase in reserves in return. What level of excess reserves does the bank now have?
Reserves = 20,000 + 15,000 = 35,000 Reserves dont change, = 20,000 Excess reserves = Actual - required = 35,000 - 20,000 = 15,000
Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $5000 in securities to the Federal Reserve Bank in its district, receiving a $5000 increase in reserves in return. What level of excess reserves does the bank now have?
Reserves = 20,000 + new deposit 5,000 = 25,000 No change in checkable deposits due to sale, so required reserves dont change, still equal 20,000. Excess reserves = actual - required = 25,000 - 20,000 = 5,000
Wahoo bank buys $50,000 of bonds from a securities dealer. What rises? What does this do to money supply?
The dealer's checkable deposits rise by $50,000, increasing money supply
lending policies must be prudent to prevent
bank "panics" or "runs" on banks by depositors worried about the availability of their funds
reserves are a ____ to banks, but a _______ to the Federal Reserve Bank system
assets to banks, but liabilities to the Fed Reserve Bank system
US banks are required to keep a small fraction of
checkable deposits as reserves
The value of the assets must equal the value of
claims or liabilities plus net worth
What do Required reserves allow the Fed to do
control credit and money creation
Loan repayments ___ money and the ___________________ increases that destruction
destroy, money multiplier
what did the FDIC do in the Bank Panics of 1930-33
ended bank panics on insured accounts
Banks cannot loan more than their
excess reserves
Maximum deposit expansion possible or new checkable deposit money (D) is equal to
excess reserves (E) * monetary multiplier (m) = D = E * m
What is the rate paid when banks borrow from one another in the federal funds market
federal funds rate
How were loans created with the goldsmiths
goldsmiths loaned other people gold that was stored in their vaults by issuing their own receipts to borrowers, who agreed to repay the Goldsmith the "loaned" gold principal plus interest
What happened to many of the failed banks in the bank panics of 1930-1933
healthy banks suffered when worried depositors panicked and withdrew funds all at once
What do banks primarily earn profits from
interest on loans and the securities they hold
loan repayments and money multipliers have what type of relationship
inverse
fractional reserve banking started the creation of money by banks by
lending more than the value of their original reserves on hand
claims against a bank are also called
liabilities
nonowners' claims are called
liabilities
Banks must seek safety by having what 2 things
liquidity to meet the cash needs of their depositors and to meet check clearing transactions
most transaction accounts are created as a result of
loans from banks or thrifts
higher reserve ratios generate
lower money multipliers
Banks can borrow from one another to
meet cash needs in the federal funds market, where banks borrow from each other's available reserves on an overnight basis
What is the formula for monetary or checkable deposit multiplier
monetary multiplier = 1/required reserves ratio OR m=1/R
changing the money multiplier changes the
money creation potential
The receipts issued for customer deposits were used as
money in place of the gold they represented
changing the reserve ratio changes the
money multiplier
cutting the reserve ratio in half will
more than double the deposit creation potential of the system
Contraction of excess reserves leads to
multiple contraction of the money supply
the bank owners' claim on the bank is called
net worth
what are a fraction of a commercial bank's total deposits
required reserves specified by the Fed Reserve System
In the 16th century, what did Goldsmiths offer
safe storage of gold and precious metals for their consumers. They issued receipts to their customers for these deposits
Who now creates lending policies to prevents bank panic "runs"
the US deposit insurance system - FDIC & FSLIC
how was fractional reserve banking created with the loans from goldsmiths
the actual hold in the vaults became only a fraction of the total value of the receipts outstanding held by borrowers and owners of gold
What can changing the reserve ratio also change in addition to the money multiplier
the amount of excess reserves that are acted on by the multiplier
What states assets and claims against the bank at some specific point in time
the balance sheet of a bank
What loans were the beginning of "fractional reserve baking"
the loans created by goldsmiths
when banks or the Federal Reserve sell government securities to the public, what happens to money supply?
they decrease supply of money like a loan repayment does
Why did President Roosevelt declare a "bank holiday"
to close banks temporarily while Congress started the Fed Deposit Insurance Corporation (FDIC), which ended bank panics on insured accounts
What is the purpose of required reserves
to give Fed Reserve control over the amount of lending or deposits that banks create
What are examples of checkable deposits as reserves
vault cash or as deposits with the central bank
How can banks create money in much the same way as a loan does
when banks or the Fed buy government securities from the public
What 2 ways can commercial banks keep reserves as deposits
with the Fed or as cash in their vaults ("vault cash")
. In Wahoo, Nebraska, the Wahoo bank is formed with
$250,000 worth of owners' stock shares
What are three simplifying assumptions of the banking system
1. Assume the required reserve ratio is 20% 2. Initially banks have no excess reserves (they are "loaned up") 3. When banks have excess reserves, they loan it all to one borrower, who writes a check for the entire amount to give to someone else, who deposits it at another bank. The check clears against the original owner
Suppose a junkyard owner finds a $100 bill and deposits it in Bank A. The reserve ratio is 20%. What happens with the system's lending?
1. Bank A has $80 in excess reserves (100 * 20%), lending this amount and has the borrower write a check for the amount 2. The check written is deposited into Bank B 3. See further lending affects on Bank C
What is the process of the formation of a commercial bank
1. Formed with owners' stock shares 2. The bank obtains property and equipment with some of its capital funds 3. The bank begins operations by accepting deposits 4. The bank must keep reserve deposits in its district Fed Reserve Bank
Wahoo Bank grants a loan of $50,000 to Gristly in Wahoo. Wahoo Bank has reached its lending limit: It has no more excess reserves as soon as Gristly Meat Packing writes a check for $50,000 to Quickbuck Construction. What happens with the bank?
1. Money ($50,000) has been created in the form of new demand deposit worth $50,000. 2. Legally, a bank can lend only to the extent of its excess reserves.
A $50,000 check is drawn against Wahoo Bank by Mr. Bradshaw, who buys farm equipment in Surprise, Nebraska. The Surprise company deposits the check in Surprise Bank. What happens to Surprise Bank's and Wahoo Bank's reserves at the Fed, Mr. Bradshaw's account, and Surprise Bank's company account?
1. The Surprise company gains and Wahoo Bank loses $50,000 reserves at the Fed. 2. Mr. Bradshaw's account goes down 3. Surprise implement company's account increases in Surprise bank
What is the actual reserve ratio average
10% of checkable deposits
By how much was the money supply reduced in the yars of the bank panics of 1930-33
25%
Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?
Assets = Liabilities + Net worth $100,000 = liabilities + $20,000 Liabilities = $80,000 Liabilities increased by $80,000
what is the basic equation of the balance sheet of a bank
Assets = liabilities + net worth
when banks borrow from each other's available reserves on an overnight basis, the rate paid is called the
Federal Funds Rate
What did the bank panics in 1930-33 lead to
a multiple contraction of the money supply, which worsened the Depression, because the Fed failed to respond.
Balance sheet: Suppose that Big Bucks Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent. Checkable deposits = 100,000; Reserves = 24,000; Securities = 38,000; loans = 38,000; Find (1) and (2) for each: a. What is the maximum amount of new loans that Big Bucks Bank can make? b. By how much has the supply of money changed? $ c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against this bank? Show this new balance sheet in column 2 and 2'. d. Revisit parts a., b., and c., and provide answers below based on the assumption that the reserve ratio is now 15 percent. What is the maximum amount of new loans that this bank can make? $ Show in column 3 and 3' (below) how the bank's balance sheet will appear after the bank has lent this additional amount. By how much has the supply of money changed?
a. Required reserves = 100,000 * .2 = 20,000 Excess = actual - required = 24,000 - 20,000 = 4,000 No change in reserves or securities intially
How do you find excess reserves
actual reserves - required reserves
The term "bank" is also used generically to apply to all depository institutions
all depository institutions (banks and thrift institutions)
the entire banking system can create
an amount of money which is a multiple of the system's excess reserves, even though each bank in the system can only lend dollar for dollar with its excess reserves
Banks must keep what to meet depositors' needs
cash on hand (withdrawals)
The term "depository institution" refers to
banks and thrift institutions
why dont required reserves exist to protect against "runs"
because banks must keep their required reserves
why are reserves assets to banks, but liabilities to the Fed Reserve Bank system
because they are deposit claims by banks against the Fed
How can banks create liquidity
by borrowing from one another to meet cash needs in the federal funds market
How can banks create money
by lending more than the value of their original reserves on hand