Unit 4 - Bank Balance Sheets

• How do banks "create" money? 
• By lending out money (deposits that are used multiple times)
• Where do loans come from? 
• From depositors who take cash and place it in their banks 
• How are the amounts of potential loans calculated?
• Using their bank balances sheet or T-accounts that consist of assets and liabilities for banks. 
• Bank Liabilities (the right side of the T Account Sheet)
• Demand Deposits or checkable deposits 
•  cash deposit from the public
• Are liabilities because it belongs to depositors
• There are values of stocks held by the public - ownership of bank shares
• Key Concept for AP Concerning Liabilities
• If demand deposit comes from someone's cash holdings, then the DD is already part of the money supply.
• DD comes in from the purchase of bonds by the FED, then this creates new cash and therefore creates new money supply (M1)
• 7 Functions of FED
• issues paper currency
• sets reserve requirements and holds reserve of banks
• lends money to banks and charges them interest
• check charging service for banks
• acts as permanent bank for gov't 
• supervise member banks
• controls the money supple in the economy 
• Bank Assets (left side of the T Account Sheet)
• Required Reserve (RR) - Percentage of demand deposits that must be held in the vault so home depositors have access to their money. The amount can vary, but AP usually uses 5%, 10% or 20% for easy calculations.
• Excess Reserves- source of new loans. These amount are applies to the monetary multiplier/ reserve multiplier (DD= RR + RR) 
• Bank Property Holdings (building and fixtures)
• Securities (Federal Bonds) - These are bonds purchases by the bank, or new bonds sold to the bank by the Federal Reserve. These bonds can be purchased from the bank, turned into cash that immediately becomes available as excess reserves.
• Customer Loans- can use amounts held by banks from previous transaction used by previous customers
• Money creation (Using Excess Reserves) 
• Banks want to create money they generate profit by lending the excess reserves and collecting interest. Since each loan will go out into customers and business accounts, more loans are created in decreasing amounts because of reserve requirement. A rough estimate of the number of loan amounts created by any first loan is the "money multiplier."
• The Monetary Multiplier (aka)
• Checkable Deposits Multiplier
• Reserve Multiplier
• Loan Multiplier
• The Formula is simple: 1/RR
• Excess Reserves are Multiplied by the Multiplier to create new loans for the entire banking system and this creates new money supply.