How Lending Creates Money Bank Lending -Each time a bank issues a note, it creates money. -Banking Systems in Canada:
The Bank of Canada
Chartered Banks
-Scotiabank -RBC -TD -BMO -CIBC -National Bank These are the only banks that can increase or decrease the money supply by lending. -Demand Deposites: amount held in personal accounts. -Target Reserve: amount of demand deposites that a bank wantts to hold as cash -Target Reserve ratio: percentage of demand deposites a bank wants to hold in cash (target reserve/demand deposites)x100 - Excess Reserves: amount of cash held by a bank in addition to the target reserve excess reserves are used for loans From the demostration in class we, we found that when there's an increase in demand deposites by $1, the money supply increased by $2.50. (information taken fomr class notes) How lending creates money Each time a bank lend out money, it creates money or adds to money supply and it is only the banks that are accountble to Bank of Canada that have this previledge. This banks are called federally charactered banks. How it works; From the demand deposit,i.e the amount held in personal account, the bank is expected to hold a reserve known as target reserve(Target ratio*Demand Deposits). After the bank held back this target reserve, any amount left of the demand deposit is known as excess reserve and it is this excess reserve that the banks use for loans. The loans that the bank lends out multiplies because of the money multiplier. The increase in total deposits that would occur in the whole banking system as a result of a new deposit in a single bank. The formula for money Multiplier = change in deposits/change in reserves = 1/target reserve ratio.
Bank run
When people go to the bank and to get money but the bank has run out of money. bank reserves and the BOC are set up to fix this problem. The BOC instil confidence in the people, if the banks run out of money, the boc will borrow them.
What is a bank run and how is it resolved? A bank run is when a bank runs out of cash. Banks not only hold people's money they also make money by providing loans. If a number of people choose to withdraw their money simultaneously then the bank my not have the cash on hand necessary to meet people's demand. In this case, chartered banks can borrow from other chartered banks (at the overnight target rate) or from the Bank of Canada (at the bank rate) to meet the needs of the bank's customer
Bank Lending
-Each time a bank issues a note, it creates money.
-Banking Systems in Canada:
- The Bank of Canada
- Chartered Banks
-Scotiabank-RBC
-TD
-BMO
-CIBC
-National Bank
These are the only banks that can increase or decrease the money supply by lending.
-Demand Deposites: amount held in personal accounts.
-Target Reserve: amount of demand deposites that a bank wantts to hold as cash
-Target Reserve ratio: percentage of demand deposites a bank wants to hold in cash
(target reserve/demand deposites)x100
- Excess Reserves: amount of cash held by a bank in addition to the target reserve
excess reserves are used for loans
From the demostration in class we, we found that when there's an increase in demand deposites by $1, the money supply increased by $2.50.
(information taken fomr class notes)
How lending creates money
Each time a bank lend out money, it creates money or adds to money supply and it is only the banks that are accountble to Bank of Canada that have this previledge. This banks are called federally charactered banks. How it works; From the demand deposit,i.e the amount held in personal account, the bank is expected to hold a reserve known as target reserve(Target ratio*Demand Deposits). After the bank held back this target reserve, any amount left of the demand deposit is known as excess reserve and it is this excess reserve that the banks use for loans. The loans that the bank lends out multiplies because of the money multiplier. The increase in total deposits that would occur in the whole banking system as a result of a new deposit in a single bank. The formula for money Multiplier = change in deposits/change in reserves = 1/target reserve ratio.
Bank run
When people go to the bank and to get money but the bank has run out of money. bank reserves and the BOC are set up to fix this problem. The BOC instil confidence in the people, if the banks run out of money, the boc will borrow them.
What is a bank run and how is it resolved?A bank run is when a bank runs out of cash. Banks not only hold people's money they also
make money by providing loans. If a number of people choose to withdraw their money
simultaneously then the bank my not have the cash on hand necessary to meet people's
demand. In this case, chartered banks can borrow from other chartered banks (at the
overnight target rate) or from the Bank of Canada (at the bank rate) to meet the needs of the
bank's customer
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