commercial bank

Examples of commercial bank in the following topics:

• The Money Multiplier in Theory

  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • When you think of money, what you probably imagine is commercial bank money.
  • This money is created when commercial banks make loans to companies or individuals.
  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio.

• The Fractional Reserve System

  • This is called the fractional-reserve banking system: banks only hold a fraction of total deposits as cash on hand.
  • These assets are typically held in the form of physical cash stored in a bank vault and in reserves deposited with the central bank.
  • Because banks are only required to keep a fraction of their deposits in reserve and may loan out the rest, banks are able to create money.
  • Creating reserves means that commercial banks have more reserves with which they can satisfy the reserve ratio requirement, leading to more loans and an increase in the money supply.
  • The diagram shows the process through which commercial banks create money by issuing loans.

• Measuring the Money Supply: M1

  • Checkable deposits refer to all spendable deposits in commercial banks and thrifts.
  • The bank sets 10% of the amount aside for required reserves, while the remaining $810 can be lent out by the bank as credit.
  • Mandy deposits the money in a checking account at another bank.
  • Mandy's bank now lends the money to someone else who deposits it in a checking account at another bank, and the process repeats itself.
  • The M1 measure includes currency in the hands of the public and checkable deposits in commercial banks.

• The Creation of the Federal Reserve

  • Until 1913, the United States did not have a true central bank.
  • Commercial banks are required to hold a certain proportion of their deposits in reserves and not lend them out.
  • Commercial banks are required to have a certain amount of reserves on hand at the end of each day.
  • If they are going to come up short, they must borrow from other banks or the Fed.
  • Explain monetary policy as the main function of a central bank

• Money in the U.S. Economy

  • "The Fed," as it is commonly known, includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank branches.
  • All nationally chartered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks.
  • In general, a bank that is a member of the Federal Reserve System uses the Reserve Bank in its region in the same way that a person uses a bank in his or her community.
  • Banks often lend each other money over night to meet their reserve requirements.
  • The Fed's third tool is the discount rate, or the interest rate that commercial banks pay to borrow funds from Reserve Banks.

• The Structure and Function of Other Banks

  • Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior.
  • The banks borrow cash, and when the repo notes come due the participating banks bid again.
  • The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based.
  • The structure and function of the Bank of England served as a model for the central banks formed later.
  • Summarize the structure of the ECB, the Bank of England, and the People's Bank of China

• Glossary

  • Commercial bank: A bank that offers a broad range of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses -- in contrast to investment banking firms such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.
  • Discount rate: The interest rate paid by commercial banks to borrow funds from Federal Reserve Banks.
  • Federal Reserve Bank: One of the 12 operating arms of the Federal Reserve System, located throughout the United States, that together with their 25 branches carry out various functions of the U.S. central bank system.
  • Panic: A series of unexpected cash withdrawals from a bank caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. many depositors withdraw cash almost simultaneously.
  • Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.

• Other Measurements of the Money Supply

  • MB is the total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed).
  • M4: M4- + treasury bills (or M3 + commercial paper + T-bills)
  • The different forms of money in the government money supply statistics arise from the practice of fractional-reserve banking.
  • Fractional-reserve banking is the practice whereby a bank retains only a portion of its customers' deposits as readily available reserves from which to satisfy demands for withdrawals.
  • Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created.

• The Special Case of Banking

  • Banks are a special case when it comes to regulation.
  • Deposit insurance was designed to prevent such runs on banks.
  • The new law went beyond the considerable freedom that banks already were enjoying to offer everything from consumer banking to underwriting securities.
  • In particular, Congress allowed S&Ls to engage in consumer, business, and commercial real estate lending.
  • Besides giving banks funds that can be used to absorb losses, capital requirements encourage bank owners to operate responsibly since they will lose these funds in the event their banks fail.

• The Definition of Money

  • Fiduciary money includes demand deposits (such as checking accounts) of banks.
  • Fiduciary money is accepted on the basis of the trust its issuer (the bank) commands.
  • It is a standard of relative worth and deferred payment, and as such is a necessary prerequisite for the formulation of commercial agreements that involve debt.