Banking by yurtgc548

VIEWS: 2 PAGES: 14

									Banking
         Evolution of Banks
• Began with goldsmiths in the 1500’s
  – Provided storage for gold
  – Issued receipts
• Receipts traded directly for goods
• Receipts issued in excess of reserves
  – Made interest-earning loans
• Beginning of fractional reserve system
        Evolution of Banks
• Central banks took over money supply
• Originally backed currency with gold,
  removed in 1971
• Fiat Money – declared by governments to
  be legal tender
   Financial Institutions
ROLE:

• Intermediary between savers and
  borrowers
• Create liquidity
        • Borrow short (deposits)
        • Lend long (loans)
• Minimize costs
        • Finding a lender
        • Monitoring loans
             MACROECONOMICS:
           Circular Flow Model
 Exports                              Imports
                WAGES, INTEREST,
                  RENT, PROFIT




Businesses        Government        Households


               CONSUMER SPENDING


     LOANS                         SAVINGS
                     Financial
                  Intermediaries
   Financial Institutions
TYPES:

1. CHARTERED BANKS
     •   Private firm
     •   Created under the Bank Act of 1992
     •   Receive deposits, make loans
     •   11 Canadian owned
     •   43 Foreign owned
   Financial Institutions
TYPES:

1. CHARTERED BANKS
     •   Canada - “Big Five”
     •   Royal Bank
     •   Bank of Montreal
     •   Canadian Imperial Bank of Commerce
     •   Bank of Nova Scotia
     •   TD Canada Trust
    Financial Institutions
TYPES:

2. NEAR BANKS
   • Credit Union / Caisse Populaire
     • Cooperative organization
     • Take deposits, make loans to members
  • Trust and Mortgage Loan Companies
     • Privately owned depository institution
     • Take deposits, make loans
     • Trustee for pension funds, estates
    How Banks Create Money
CUSTOMER   BANK

  $1000            • Customer deposits $1000
           $900
                   • Bank keeps 10% reserve,
                     loans $900
           $810    • Bank keeps 10% reserve,
                     loans $810
           $810
                   • So far, bank has created
           $900      810 + 900 = $1710
           $1000
How Banks Create Money


     Potential       cash reserves
  Total Deposits = cash reserve ratio
How Banks Create Money

      Potential       cash reserves
   Total Deposits = cash reserve ratio



      Cash reserves = $1000, ratio = 10%

Potential Deposits = 1000 / .10 = $10,000
                  Definitions

Cash Reserves:
 amount of cash kept on hand by a bank to cover day to
 day withdrawals.


Cash Reserve Ratio:
 the percentage of total deposits kept as reserves.
                 Safeguards
1. Low need for cash
  •   Most transactions transferred by cheque or
      electronically
2. Withdrawals offset by deposits
3. Deposit insurance
  •   Canada Insurance Deposit Corporation (CIDC)
  •   Insures up to $100,000 per person, per institution
      (changed 2005 from $60,000)
4. Audits
  •   Bank of Canada ensures sound investments
          How Much Money?

• Statistically, 2% reserve ratio is safe
  EXAMPLE:
  Deposits = $1,000,000
  Potential = Reserves / Ratio
            = 1,000,000 / .02
            = $50,000,000

								
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