Overview
Purpose:
To help viewers understand the key role of banks in the U.S. economy and how government agencies act to prevent individual bank failures from becoming banking crises.
Objectives:
1. Banks play a key role in the economy by holding deposits, handling withdrawals, and making loans.
a) banks only need a small fraction of their deposits in cash to handle withdrawals.
b) banks are forced by banking regulations to hold a certain percentage of their deposits as reserves.
2. A balance sheet tallies a bank’s assets and liabilities.
a) cash and loans are the primary assets
b) deposits are the primary liabilities
3. The banking system can expand the amount of money in circulation by making loans.
a) the amount of the expansion is limited by the reserve ratio.
b) during depressions deposit contraction takes place.
4. Various government agencies regulate banks and are able to reduce the risk of bank failure.
a) the Federal Reserve acts as a lender of last resort.
b) the FDIC insures the deposits of some banks
c) regulators examine banks’ books in order to prevent excessively risky bank practices
| Key Economic Concepts deposits, multiple expansion of bank deposits, reserve ratio, lender of last resort, liabilities, loans, balance sheets , assets, Federal Reserve System, bank runs, FDIC, deposit insurance, fractional reserves, deposit contraction. |
| Contemporary Issues During the course of 2001, the Bank of Japan increased bank reserves by 25%. During that time, bank lending fell by 2%. What might explain the apparent divergence between the increasing reserves in a bank and its unwillingness to make loans? How much of this might be due to a lack of demand for new loans (because of weak economic growth) or risk aversion on the part of the banks (because they already have a large portfolio of loans in default)? How might the Bank of Japan go about fixing this problem? |
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