After reading this chapter, you should be able to: Explain the basics of a bank's balance sheet and discuss why the . banking system is called a "fractional reserve" system, explain the distinction between a bank's actual reserves and its required reserves, describe how a bank can create money, describe the multiple expansion of loans and money by the entire banking system. | Money Creation 15 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Fractional Reserve System The Goldsmiths Stored gold and gave a receipt Receipts used as money by public Made loans by issuing receipts Characteristics: Banks create money through lending Banks are subject to “panics” LO1 Fractional Reserve System Balance sheet Assets = Liabilities + Net Worth Both sides balance Necessary transactions Create a bank Accept deposits Lend excess reserves LO1 A Single Commercial Bank Transaction #1 Vault cash: cash held by the bank Assets Liabilities and Net Worth Creating a Bank Balance Sheet 1: Wahoo Bank Cash $250,000 Stock Shares $250,000 LO1 A Single Commercial Bank Transaction #2 Acquiring property and equipment Assets Liabilities and Net Worth Acquiring Property and Equipment Balance Sheet 2: Wahoo Bank Cash $10,000 Stock Shares $250,000 Property 240,000 LO1 A Single Commercial Bank Transaction #3 Commercial bank . | Money Creation 15 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Fractional Reserve System The Goldsmiths Stored gold and gave a receipt Receipts used as money by public Made loans by issuing receipts Characteristics: Banks create money through lending Banks are subject to “panics” LO1 Fractional Reserve System Balance sheet Assets = Liabilities + Net Worth Both sides balance Necessary transactions Create a bank Accept deposits Lend excess reserves LO1 A Single Commercial Bank Transaction #1 Vault cash: cash held by the bank Assets Liabilities and Net Worth Creating a Bank Balance Sheet 1: Wahoo Bank Cash $250,000 Stock Shares $250,000 LO1 A Single Commercial Bank Transaction #2 Acquiring property and equipment Assets Liabilities and Net Worth Acquiring Property and Equipment Balance Sheet 2: Wahoo Bank Cash $10,000 Stock Shares $250,000 Property 240,000 LO1 A Single Commercial Bank Transaction #3 Commercial bank functions Accepting deposits Making loans Assets Liabilities and Net Worth Accepting Deposits Balance Sheet 3: Wahoo Bank Cash $110,000 Checkable Deposits $100,000 Property 240,000 Stock Shares 250,000 LO1 A Single Commercial Bank Transaction #4 Depositing reserves in a Federal Reserve bank Required reserves Reserve ratio Reserve ratio = Commercial bank’s Required reserves Commercial bank’s Checkable-deposit liabilities LO2 A Single Commercial Bank The Fed can establish and vary the reserve ratio within limits set by Congress Required reserves help the Fed control lending abilities of commercial banks LO2 Type of Deposit Current Requirement Statutory Limits Checkable deposits: $0-$ Million $$ Million Over $ Million Noncheckable nonpersonal savings and time deposits 0% 3 10 3% 3 8-14 0 0-9 A Single Commercial Bank Assets Liabilities and Net Worth Depositing Reserves at the Fed Balance Sheet 4: Wahoo Bank Cash $0 Checkable Deposits $100,000 Property 240,000 Stock .
