Money, Banking, and Finance Chapter 11

= M2	8198.2		9089.7
+ Repurchase agreements	331.0		122.3
+ Money market fund (MMF) shares/units	745.0		457.8
+ Debt securities up to 2 years	171.8		140.0
= M3	9445.9		9809.9

The Banking System

Table 11.1 A Simplified Balance Sheet of a Commercial Bank

Assets		Liabilities
Reserves	€10 million	Deposits	€100 million
Government bonds	€20 million
Loans	€70 million

bank reserves: funds not loaned out by a private bank, but kept as vault cash or as deposit at the central bank
In most countries, banks are required to keep some share of their deposits as reserves – this is called required reserves

How Commercial Banks Earn Profits

• Government bonds
• Earn interest by lending money to national governments
• Relatively safe and liquid
• Portfolio of loans
• Funds that are owed to the bank by businesses, households, nonprofits, or nonfederal levels of government
• Less liquid than government bonds
• Major asset and major way to make earnings

Table 11.2 Bank Types

	Chief Functions
Retail banks	Safekeeping of money, checking accounts, loans
Savings banks	Similar to retail bank but specializing in loans, particularly mortgages and loans to small and medium sized businesses
Cooperative banks	Same as a retail bank, but cooperatively owned by customers
Private banks	Caters almost exclusively to high net worth individuals; functions extend beyond traditional banking into variety of financial services
Investment banks	No traditional banking functions; involved in underwriting and issuing securities, assistance with company mergers and acquisitions, market making, and general advice to corporations
Universal banks	Covering both investment and retail banking services
Central banks	Overseeing the monetary stability of the national economy by setting interest rates and providing liquidity to commercial banks

Banks and Their Activities Have Been and Still Are Heavily Regulated

• Rules about
• minimum reserves, capital requirement, qualification of the management
• After WWII, binding ceilings for interest rates on deposits and loans
• USA: Banking Act (Glass-Steagall Act) of 1933: separation of commercial and investment banking
• Wave of deregulation in the 1990s
• Re-regulations after the financial and economic crisis 2008-09