Banks and the Creation of Money

Basic Accounting and

Bank Lending

1. For any business:

Assets = Liabilities + Capital

Basic Accounting and

Bank Lending

2. Bank assets include

- Building

- Holding of government securities

- Stocks and bonds

- Cash

- Loans **

Basic Accounting and

Bank Lending

3. Bank liabilities include

- the usual stuff

- customer deposits **

Banks and the Creation of Money

1. Banks wish to make profit, and the only way they can do this is by making loans.

2. Banks make loans out of their customer’s deposits.

Banks and the Creation of Money

3. Banks set aside legal reserves ( also called required reserves), and then lend out the rest.

4. In the process of lending customer deposits, banks create money and expand the money supply.

Process

1. Banks total up all of the different types of customers deposits.

2. This total of customer deposits becomes the total reserves of the bank.

3. Out of the total reserves, bank must subtract out the required reserves.

Process

4. What is left over are the excess reserves.

5. The excess reserves are lent out and become loans.

Process

The greater the amount of excess reserves that are lent out, the more loans a bank has.

The more loans it has, the more revenues it will generate.

The more revenue, the greater the profits.

Process

Therefore banks have a great incentive to turn all excess reserves to loans.