Monetary PolicyMonetary PolicyControlling the expansion and/or

contraction of the money supplyInfluences the cost and availability of credit

Fractional Bank ReservesBanks only keep a fraction of their deposits

as reservesLegal reserves – coins, currency, and deposits

that fulfill reserve requirementMember banks keep some reserves at Fed

district bankKnown as member bank reserves

Key Monetary TermsKey Monetary TermsLiabilities

debts and obligations to othersAssets

PropertiesPossessionsClaims on others

Balance sheet Condensed statement showing all assets and

liabilitiesNet worth

Excess assets over liabilities

How Banks OperateHow Banks OperateOrganizing a Bank

Obtain a charterBank has corporate structure

Investors help build assets

Balance SheetAssets –

Liabilities = Net Worth

Assets = Liabilities + Net Worth

Assets Liabilities

Required Reserves: Demand Deposits:

Cash:

Loans: Net Worth Equity: $20

Bonds:

Buildings and Furniture: $20

$20 $20

Accepting DepositsAccepting DepositsDeposits are reflected in two ways

1. liability to indicate asset is owed to depositor

2. asset to show cash is property of bank

Deposits are shown as asset and reserve

Assets Liabilities

Required Reserves: $10

Demand Deposits: $100

Cash: $90

Loans: Net Worth Equity: $20

Bonds:

Buildings and Furniture: $20

$120 $120

Making LoansMaking LoansBank is free to loan out excess reservesOnce loaned, that money moves to loans,

or accounts receivableBank makes income on interest charged

for loansUsed to pay billsThen generally

paid out as stock dividend

Assets Liabilities

Required Reserves: $10

Demand Deposits: $100

Cash:

Loans: $90

Net Worth Equity: $20

Bonds:

Buildings and Furniture: $20

$120 $120

Reaching MaturityReaching MaturityBank will grow and diversify assets and liabilities

Some banks buy bonds and securitiesEarn interestHigh degree of liquidity

Also offer certificate of deposit and savings accounts

Attempt to maintain a 2%-3% spread on loansEnsures the bank will make money