Money, Banking, and Finance Chapter 11



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Bog'liq
EuroMAC Ch11

= M2

8198.2

9089.7

+ Repurchase agreements

331.0

122.3

+ Money market fund (MMF) shares/units

745.0

457.8

+ Debt securities up to 2 years

171.8

140.0

= M3

9445.9

9809.9

The Banking System

Table 11.1 A Simplified Balance Sheet of a Commercial Bank


Assets

Liabilities

Reserves

€10 million

Deposits

€100 million

Government bonds

€20 million



Loans

€70 million



bank reserves: funds not loaned out by a private bank, but kept as vault cash or as deposit at the central bank
In most countries, banks are required to keep some share of their deposits as reserves – this is called required reserves

How Commercial Banks Earn Profits

  • Government bonds
    • Earn interest by lending money to national governments
    • Relatively safe and liquid
  • Portfolio of loans
    • Funds that are owed to the bank by businesses, households, nonprofits, or nonfederal levels of government
    • Less liquid than government bonds
    • Major asset and major way to make earnings

Table 11.2 Bank Types


 

Chief Functions

Retail banks

Safekeeping of money, checking accounts, loans

Savings banks

Similar to retail bank but specializing in loans, particularly mortgages and loans to small and medium sized businesses

Cooperative banks

Same as a retail bank, but cooperatively owned by customers

Private banks

Caters almost exclusively to high net worth individuals; functions extend beyond traditional banking into variety of financial services

Investment banks

No traditional banking functions; involved in underwriting and issuing securities, assistance with company mergers and acquisitions, market making, and general advice to corporations

Universal banks

Covering both investment and retail banking services

Central banks

Overseeing the monetary stability of the national economy by setting interest rates and providing liquidity to commercial banks

Banks and Their Activities Have Been and Still Are Heavily Regulated

  • Rules about
    • minimum reserves, capital requirement, qualification of the management
  • After WWII, binding ceilings for interest rates on deposits and loans
  • USA: Banking Act (Glass-Steagall Act) of 1933: separation of commercial and investment banking
  • Wave of deregulation in the 1990s
  • Re-regulations after the financial and economic crisis 2008-09

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