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Chapter13

Money creating transaction of a commercial bank


Granting a loan

In addition to accepting deposits, commercial banks grant loan to borrowers. According


to this article, EON Capital bhd expects its loan to register at least 10% growth. This
company alert on consumer spending, but they have put in place strategies to ride this
out. While loan growth during the first quarter was rather flat, the last month however
have seen an uptrend in the loan trend.

If they achieve their target it would translate into good financial improvement. a single
commercial bank in a multibank banking system can only amount equal to its initial
preloan excess reserves. When its lends, the lending banks faces the possibility that
checks for entire amount of the loan will be drawn & cleared against it. If that happens,
the lending bank will lose (to other bank) reserves equal to the amount its lends. So to be
safe, it limits its lending to the amount of its excess reserve.
Chapter13
Money creating transaction of a commercial bank.
Liquidity
This article elaborate in terms of liquidity which is SEC(US Securities and Exchange
Commission) will require investment banks to disclose their capital and liquidity levels
after the agency was criticizes following he Bear Stearns collapse. The SEC is
reevaluating its oversight of securities firms after the Federal Reserve had to help Bear
Stearns to prevent a panic amid a global credit contraction. Data on capital and liquidity
will be required that year and SEC already collects much of the information without
giving it to the public. The SEC’s supervision of securities firms and the adequacy of its
resources for monitoring them drew scrutiny from the US senate at two hearings.
An interesting way in which banks can partly reconcile the goals of profit and liquidity is
to lend temporary excess reserve held at the federal Reserves banks to other commercial
banks. Funds held at the federal reserved banks are highly liquid, but they do not draw
interest. Banks therefore lend these excess reserves to other banks on an overnight basis
as a way of earning additional interest without sacrificing long-term liquidity.
Chapter13
A Single commercial bank
Depositing reserves in Federal Reserve Bank

All commercial banks and thrifts institutions that provide checkable deposit must by law
keep required reserves. Required reserves are the amount of funds equal to a specified
percentage of a bank’s own deposit liabilities.in this case,Most economists are betting
that the federal open market committee will keep the federal funds rate firmly anchored at
2% amid lackluster economic growth. Official data revealed that the economy grew at
1.9% pace in the second quarter which marked an improvement from the first three
months of the year, but economy got a timely boost from a giant US$168 Billion
emergency stimulus. According to another, America’s unemployment rate meanwhile
tricked up to 5.7% during July. If market predictions come true, the fed will keep rates on
hold for a second straight time on Tuesday after slashing rates aggressively by 3.25%
points between September and late April.

Required reserves help the fed control the lending ability of commercial banks. The fed
can take certain actions that either increase or decrease commercial banks reserves and
affect the ability of banks to grant credit.
Chapter12
Money, banking and monetary policy
The federal reserves and the banking system

In this arthicle, Billionaire investor, George Soros speaks about the crisis as the US
economy is now feeling the effect. The world’s biggest banks and securities firms have
reported credit losses and write downs of about US$319 billion after the collapse of the
US subprime mortgage market. The US dollar would certainly come under renewed
pressure if the Federal Reserve were to further reduce interest rates. Soros also said that
certain standards need to be set for the funds because they could come under political
influence.the central authority of the U.S money and banking system is the board of
governers of the federal reserves system. The 12 federal reserves banks,which blend
private and public control,collectively serve as nations central banks. These banks also
serve as bankers banks. Congress purposely established the fed as an independent agency
of government. The objective was to protect the fed from political pressures so that it
could effectively control the money supply and maintain the price stability. Polical
pressures on congress and the executive branch may at times result in inflationary fiscal
policies,including tax cuts and special interest spending.
Chapter13
Money creation
Accepting deposits
With deposit insurance a growing number of savers are turning to a network called
certificates of deposit account registry service,or CDARS, to simplify the process and
maintain insurance coverage on up to $50 million.The CDARS network,was a way for
smaller banks to try to level the playing field,at least when it come to deposit insurance.
Commercial banks have two basic function,:to accept deposits of money and to make
loans. In this case,in this tenure as banking regulators,all heard frequently from smaller
banks working hard to compete againsts giant like bank of amarica and Wachovia. Small
banks felt at a disadvantage competing for larger accounts in part because of the so called
‘too big too fail’ doctrine. Many customers believes rightly and wrongly that regulators
would never let a major national bank fail,so they didn’t worry about exceeding the
deposit insurance limits at bigger banks. A withdrawal of cash will reduce the banks
checkable deposit liabilities and its holdings of cash by the amount of the
withdrawals.this,too changes the compositions, but not the total supply,of money in the
economy.