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Monetary Policy

This overview explores the fundamentals of monetary policy, highlighting how it manages the money supply to influence credit costs and availability. It examines key banking concepts such as fractional reserves, liabilities, assets, and balance sheets. Learn how banks operate, from obtaining charters and accepting deposits to making loans and managing their asset-liability balance. The text outlines the importance of net worth and reserve requirements while discussing the strategies banks use to ensure profitability, including maintaining interest spreads and diversifying their investments.

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Monetary Policy

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Presentation Transcript

  1. Monetary Policy • Controlling the expansion and/or contraction of the money supply • Influences the cost and availability of credit • Fractional Bank Reserves • Banks only keep a fraction of their deposits as reserves • Legal reserves – coins, currency, and deposits that fulfill reserve requirement • Member banks keep some reserves at Fed district bank • Known as member bank reserves

  2. Key Monetary Terms • Liabilities • debts and obligations to others • Assets • Properties • Possessions • Claims on others • Balance sheet • Condensed statement showing all assets and liabilities • Net worth • Excess assets over liabilities

  3. How Banks Operate • Organizing a Bank • Obtain a charter • Bank has corporate structure • Investors help build assets • Balance Sheet • Assets – Liabilities = Net Worth • Assets = Liabilities + Net Worth

  4. Accepting Deposits • Deposits 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

  5. Making Loans • Bank is free to loan out excess reserves • Once loaned, that money moves to loans, or accounts receivable • Bank makes income on interest charged for loans • Used to pay bills • Then generally paid out as stock dividend

  6. Reaching Maturity • Bank will grow and diversify assets and liabilities • Some banks buy bonds and securities • Earn interest • High degree of liquidity • Also offer certificate of deposit and savings accounts • Attempt to maintain a 2%-3% spread on loans • Ensures the bank will make money

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