Lecture 18
THE BANKING SYSTEM
1. Bank regulation
- Insure depositors against loss
- Deposit insurance (by FDIC)
- Monitor the financial condition of banks
- Bank examinations and audits
- Restrict type of assets that banks can hold
The Fed's definition of banks:
We use the term "banks" to refer to all depository institutions, a broad class of institutions that includes commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge Act corporations, and agreement corporations. In addition to banks, a number of government-sponsored enterprises--such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--hold reserve balances at the Fed to facilitate large payment transfers to other institutions.
https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm
2. A bank's balance sheet
- Assets
- Things of value owned by the bank
- Loans, reserves, government securities
- Liabilities
- What the bank "owes" to others
- Checking deposits, savings deposits
- Net worth = Assets - Liabilities
3. Reserve requirements
- Banks are no longer required to keep a minimum in reserves: the reserve requirement ratio = 0%. [Source: Federal Reserve Board - Reserve Requirements
]
- But they do keep reserves (why?)
- Reserves may be kept at the Fed (each bank has its own "checking account" at the Fed!)
4. Money creation
- Money is "created" through changes in the banks' reserves