The process of creating money by commercial banks. Making money by commercial banks
The process of making money by commercial banks is called credit expansion or credit animation.
It occurs if in banking money gets in and deposits of a commercial bank increase, some of which the bank issues on credit. If deposits decrease (the client withdraws money from his account), then the opposite process occurs - credit squeeze.
Commercial banks can create money only under the conditions of the system partial reservation. If the bank does not issue loans, the money supply does not change, since the amount of cash deposited is equal to the amount of reserves held by the bank. There is only a redistribution of funds between money outside the banking sector and money inside the banking system within the same amount money supply.
Maximizing the money supply occurs provided that:
Commercial banks do not store excess reserves and the entire amount of funds in excess of the required reserves is issued on credit, i.e. use their credit capabilities to the full and the reserve ratio is equal to the required reserves ratio;
- getting into the banking sector, money do not leave it and, being issued on credit to the client, do not settle him in the form of cash, and return to banking system(credited to a bank account).
Let's pretend that rr obligatory= 20% and banks fully use their credit capabilities, therefore, the reserve ratio is equal to the required reserve ratio ( rr = rr obligatory). If the bank1 receives a deposit of $ 1000, then it must deduct $ 200 in the required reserves ( R obligatory = D × rr= 1000 × 0.2 = 200), and its credit capacity will be $ 800K ( TO = D× (1 - rr) = 1000 × (1 - 0.2) = 800).
1 bank received 1,000 thousand, of which ® 20% in reserve - 200 thousand
¯ 80% for the issuance of loans - 800 thous.
2 bank received 800 thousand, of which ® 20% in reserve - 160 thousand
¯ 80% for the issuance of loans - 640 thous.
Bank 3 received 640 thousand, of which ® 20% in reserve - 128 thousand
¯ 80% for the issuance of loans - 512 thous.
By providing a loan for this amount, Bank 3 creates a prerequisite for increasing credit opportunities bank 4 by $ 409.6, bank V by $ 327.68, and so on, and a further corresponding increase in the money supply. We get a kind of pyramid reflecting deposit expansion process:
I bank D 1 = 1000
K 1 R 1 K 1 = D 1 × (1 - rr)
II bank D 2 = 800 200
K 2 R 2 K 2 = × (1 - rr)
Sh bank D 3 = 640 160
K 3 R 3 K 3 = × (1 - rr)
IV bank D 4 = 512 128
K 4 R 4 K 4 = × (1 - rr)
V bank D 5 = 409.6 102.4
K 5 R 5 K 5 = × (1 - rr) etc.
The total amount of money ( total amount deposits of banks I, P, W, IV, V, etc.) will be: M = D I + D P + D W + D IV + D V +… = D 1 + D 1 × (1 - rr) +
+ × (1 - rr) + × (1 –rr) + × (1 - rr) + + × (1 - rr) +… = 1000 + 800 + 640 + 512 + 409.6 + 327.68 +…
We get the sum of an infinitely decreasing geometric progression with the denominator rr<1 , the sum of which: М = D 1 × = D 1 ×,
D 1 - initial investment (deposits)
rr - the rate of required reserves of a commercial bank.
In our example M= 1000 × = 1000 × 5 = 5000. Thus, if deposits of commercial banks increase, then the money supply increases to a greater extent, i.e. acts multiplier effect.
The money multiplier and the bank multiplier show how many times the value of the money supply will change (increase or decrease) if the value of deposits of commercial banks changes (accordingly increases or decreases) by one unit. Thus, the multiplier acts in both directions. The money supply increases if money enters the banking system (the amount of deposits increases), and decreases if money leaves the banking system (that is, it is withdrawn from deposits). And since, as a rule, in the economy, money is simultaneously invested in banks and withdrawn from accounts, the money supply cannot change significantly.
The process of making money by commercial banks is called deposit extension, or deposit animation.
It occurs when money enters the banking sector and deposits of a commercial bank increase, some of which the bank issues on credit. If deposits decrease (the client withdraws money from his account), then the opposite process occurs - credit squeeze.
Let's say in some country there was no money, but there was a central bank. He printed money in the amount of US $ 10,000 and gave it to citizen A. In turn, citizen A deposited the funds received in an account with bank No. 1. Additionally, as a condition, we assume that the required reserve ratio in the country is 10%, i.e. e. yy= 10%. Bank # 1's balance sheet would then look like this:
In this case, $ 900, bank No. 2 will keep in the central bank, and the remaining $ 8,100, will lend to citizen B, who will place it in bank No. 3. Accordingly, the money supply will increase by 10,000 + 9000 + 8100 dollars. Balance sheet bank number 3 will look like:
Provisions 810 Credit 7290 |
Deposit 8100 |
Bank No. 3 will keep $ 810 in the central bank, and $ 7290 will again lend to citizen G, who will place the money received in bank No. 4. Thus, the money supply will increase again and will amount to 10,000 + 9000 + 8100 +7290 dollars, etc. until the amount of reserves held by the central bank reaches $ 10,000.
So the money supply created by credit multiplication
10 000 + 9 / 10 10 000 + (9 / 10) 2 10 000 + ... + (9 / 10)" 10 000,
is equal to the sum of an infinitely decreasing geometric progression with the denominator (9/10) and the first term 10,000;
In this case M s is determined by the formula of the sum of the terms of an infinitely decreasing geometric progression.
The additional money supply resulting from the appearance of a new deposit is determined by the formula
where / g liabilities - the rate of required reserves; D - initial contribution.
The coefficient 1 / yy is called bank multiplier which shows how many times the sentence M s exceeds the initial deposit.
The central bank exercising control over the supply of money cannot directly affect the entire value of the supply, consisting of cash and demand deposits:
since it does not determine the amount of deposits (this is done by the population). It only regulates the amount of cash M 0(since he himself puts it into circulation) and the amount of required reserves of commercial banks R(since they are stored in his accounts), i.e. monetary base.
Monetary base (Monetary base), or money of increased power 5, is the sum of cash and reserves controlled by the central bank:
The central bank can control and regulate the money supply in the country through regulation of the monetary base, since the money supply is the product of the monetary base by the monetary multiplier:
To derive the money multiplier, it is necessary to take into account the ratio in which the population keeps money in the form of cash (M 0) and in bank accounts (deposits D), called deposit rate cr (currency-deposit ratio - cash to deposits ratio):
Dividing the first equation by the second, we get
where ( cr + 1 ) / (cr + n)- the money multiplier, or the multiplier of the monetary base, i.e. coefficient showing how much the money supply will increase (decrease) with an increase (decrease) in the monetary base by one unit:
If we assume that there is no cash (M 0 = 0) and all money circulates only in the banking system, then from the money multiplier we get the bank multiplier
The value of the money multiplier depends on the reserve rate and the deposit rate. The higher they are, i.e. the greater the share of reserves that banks do not lend, and / or the higher the share of cash held by the population without investing it in bank accounts, the smaller the value of the money multiplier.
With the passive creation of money by commercial banks, the value of the total supply of money in the economy does not change: there is a simple transformation of central bank money into money of commercial banks no increase total money supply. It happens in the following way. A commercial bank receives central bank money from its client and issues an indefinite deposit in commercial bank money in the name of that client.
With the active creation of money by commercial banks, the total money supply in the economy increases. This happens as a result of "monetization" of non-monetary assets (gold, currency, securities, real estate, goods, etc.), as well as when issuing loans. Thus, the active creation of money by commercial banks occurs during the following operations:
When a commercial bank purchases non-monetary assets;
When a commercial bank issues loans.
Bank reserve ratio
As part of the policy of minimum reserves, the central bank, in accordance with the monetary policy requirements, sets the reserve ratio ( reserve ratio or minimum reserve rate) - r MD, i.e. - the ratio of required reserves to the reserve base established by the central bank. Reserve ratios can be differentiated depending on the size of the credit institution (reserve class), types of obligations (demand deposits, time deposits, savings, debt securities), creditors and some other conditions.
Reserve requirements ( minimum or required reserves) is the deductions of credit institutions from the volume of attracted resources in accordance with the adopted rules. Reserves can be kept in some form, both in the accounts of the central bank and in the accounts of the bank itself.
The reserve base is the volume of a credit institution's liabilities, which serves as the basis for calculating reserve requirements.
The backup requirements perform the following functions:
1) create conditions for the current regulation of banking liquidity (liquidity regulator);
2) play the role of a money buffer: during a sharp shortage of liquidity in the interbank lending market, as a rule, the short-term interest rate makes a sharp jump; in response, the central bank sharply lowers the reserve ratio.
3) are a limiter of credit issue (money supply regulator);
4) reserve liabilities are a source of seigniorage (reserve requirements are a kind of tax on banks).
The minimum reserve requirement is established by law. At the same time, the mechanism for using reserve requirements differs significantly across countries, both quantitatively and qualitatively. Currently, the most common reserve requirements as the percentage rate of the total bank liabilities or their individual items. At the same time, the norms of required reserves are usually differentiated according to certain types of deposits.
The central bank only controls the supply of money in the economy. Commercial banks create money.
The process of making money by commercial banks is called credit expansion or credit animation. It occurs when money enters the banking sector and deposits of a commercial bank increase, i.e. if cash turns into non-cash. If the amount of deposits decreases (the client withdraws money from his account), then the opposite process will occur - credit squeeze.
Commercial banks can create money only in a partial backup system. If the bank does not issue loans, the money supply does not change, since the amount of cash received on the deposit is equal to the amount of reserves stored in the bank's safe. There is only a redistribution between money outside the banking sector and money inside the banking system within the same amount of money supply. The deposit expansion process begins from the moment the bank issues a loan.
Maximizing the money supply occurs provided that:
Commercial banks do not store excess reserves and the entire amount of funds in excess of the required reserves is issued on credit, i.e. use their credit capabilities in full and the reserve ratio is equal to the required reserves ratio;
Once in the banking sector, money do not leave it and, being issued on credit to the client, do not settle him in the form of cash, and again they return to the banking system (credited to a bank account).
Suppose that the required reserve ratio rr obligatory= 20% and banks fully use their credit capabilities, therefore, the reserve ratio is equal to the required reserve ratio ( rr= rr obligatory). If bank 1 receives a deposit equal to $ 1000, it must deduct $ 200. in required reserves ( R obligatory = D * rr= 1000 * 0,2 = 200 ), and its credit capacity will be $ 800. (TO- D * (1 - rr) = 1000 * (1 - 0,2) = 800 ). If bank 1 issues this entire amount on credit to the client, as a result, his balance will look like
Bank balance 1
Assets | Liabilities |
R obligatory = 200 K = 800 | D = 1000 |
and the money supply calculated by the formula M = C + D will amount to $ 1,800. ($ 1000 on the bank's deposit and $ 800 - cash issued by the bank), i.e. will increase by 800 dollars. Thus, the basis for increasing the money supply is the issuance of loans by commercial banks.
The funds received ($ 800) are used by the client to purchase the goods and services he needs (the firm is investment, and the household is consumer or housing), creating income (revenue) for the seller, which will go to his (seller's) current account in another bank (for example , bank 2). Having received a deposit equal to $ 800, Bank 2I will deduct $ 160 to the required reserves. (800 * 0.2 = 160), and his credit capacity will be 640 dollars. (800 * (1 - 0.2) = 640):
Bank balance II
By providing a loan for this amount, Bank 3 will create the prerequisites for increasing the credit capabilities of Bank 4 by $ 409.6, Bank 5 by $ 327.68. etc. We get a kind of pyramid (Fig. 8.2), reflecting the process of deposit expansion.
Rice. 8.2. Deposit expansion process
The total amount of money (the total amount of bank deposits 1,23,4 and 5, etc.) available in the entire banking system will be:
We get the sum of an infinitely decreasing geometric progression with the denominator (1 - rr)< 1, which is equal to:
In our case M= 1000 * 1 / 0.2 = 1000 * 5 = 5000. Thus, if the deposits of commercial banks increase, the money supply increases to a greater extent, ie. acts multiplier effect
The quantity 1 / rr called bank (credit) multiplier (mult bank) or deposit expansion multiplier(deposit multiplier):
The bank multiplier shows the total amount of deposits that the banking system can create from each monetary unit deposited into an account with a commercial bank:
In our example, every dollar of the initial deposit provided $ 5. funds in bank accounts.
The multiplier acts in both directions; the money supply increases if money enters the banking system (the amount of deposits increases), and decreases if money leaves the banking system (it is withdrawn from accounts). And since, as a rule, in the economy, money is simultaneously invested in banks and withdrawn from accounts, then the money supply cannot change significantly. Such a change can only occur if the central bank changes the required reserve ratio, which will affect the lending capacity of banks and the value of the bank multiplier. It is no coincidence that the change in the required reserve ratio is one of the instruments of monetary policy (policy for regulating the money supply) of the central bank (see topic 9).
Using the bank multiplier, it is possible to calculate not only the value of the money supply ( M), but also its change ( ΔM). Since the value of the money supply consists of cash and funds in the current accounts of commercial banks (M= C + D)), then on the bank's deposit 1 money (1000 dollars) came from the sphere of cash circulation, i.e. they were already part of the money supply, there was only a redistribution of funds between C and D). Consequently, the money supply as a result of the process of deposit expansion increased by $ 4,000. (ΔM = M - D 1 = 5000 - 1000 = 4000), i.e. commercial banks have created money for this very amount thanks to their lending. The process of increasing the money supply began with the provision of a loan by bank 1 to its client in the amount of his credit facilities equal to 800 dollars. and the resulting increase in the total amount of deposits of bank 2. This, in turn, provided bank 2 with the possibility of issuing a loan in the amount of 640 dollars. and the resulting increase in the amount of bank deposits 3, etc. Therefore, the change in the money supply can be calculated as follows:
The process of deposit expansion also occurs when banks do not fully use their lending opportunities and keep excess reserves "and when the population only deposits part of the funds in a bank and keeps part in cash, but the increase in the money supply will be less.
So, for example, if banks leave in the form of excess reserves 5% of deposits without lending them out on credit, which means that the reserve ratio will be 25% (20% required reserves + 5% excess reserves), then the money supply will increase multiplicatively, but not by $ 4,000, but only by $ 3,000, since the loan from Bank 1 will amount to $ 750. (1000 - 1000 * 0.25 = 750), and the value of the deposit multiplier will be 4 (1 / 0.25 = 4).
Similarly, if the funds received from the client of bank 1, the seller does not transfer in full to his account in bank 2, leaving himself, for example, $ 100. cash, $ 700 will be deposited, and not $ 800, so bank 2 will be able to lend not $ 640, but only $ 560. (700 - 700 * 0.2 = 560). As a result, the money supply will increase, but not by the maximum amount.
If banks store excess reserves, then lending them can provide an additional increase in the supply of money, which is calculated by the formula:
In our example, if the bank issues its excess reserves equal to $ 50. (800 - 750) on credit, then an additional increase in the money supply will be 250 dollars. (50 * (1 / 0.2) = 250).
So, the change in the money supply depends on two factors:
The value of the reserves of commercial banks issued on credit;
Banking multiplier values.
Influencing one of these factors or both, the central bank can change the amount of money supply, pursuing monetary (monetary) policy.
Banks are financial intermediaries, since, on the one hand, they accept deposits (deposits), attracting money from savers, that is, they accumulate temporarily free funds, and on the other hand, they provide these funds at a certain percentage to economic agents in need of them, i.e. that is, they issue loans. Thus, banks are intermediaries in credit, therefore the banking system is part of the credit system.
The credit system consists of banking and non-banking (specialized) credit institutions. Non-bank credit institutions include funds (investment, pension, etc.), insurance companies, savings and loan associations, credit unions, pawnshops, etc., that is, all organizations that act as intermediaries in a loan. The modern banking system is two-tier. The first level is the central bank (CB), the second level is the system of commercial banks.
). International practice knows several types of banking systems:
· Distribution centralized banking system;
· Market banking system;
· The banking system of the transition period.
Distribution (centralized) banking system : the state is the only owner, the state monopoly on the formation of banks, a single-tier banking system, the policy of a single bank, the state is responsible for the obligations of banks, banks are subordinate to the government and depend on its operational activities, credit and issuance operations are concentrated in one bank, the head of the bank is appointed by the central or local authorities by higher authorities.
In contrast to the distributive (planning and administrative) system, the banking system market type characterized by the absence of a state monopoly on banking. The banking system in a market environment is characterized by banking competition. Issuance and credit functions are separated from each other. The emission of money is concentrated in the central bank, lending to enterprises and the population is carried out by various business banks - commercial, investment, innovative, mortgage, savings, etc. Commercial banks are not responsible for the obligations of the state, just as the state is not responsible for the obligations of commercial banks.
Central bank functions. The Central Bank is the main bank of the country. In the USA it is called the Federal Reserve System (FRS), in the UK - the Bank of England, in Germany - the Bundesbank, in Russia - the Central Bank of the Russian Federation (Bank of Russia).
The central bank has a monopoly on issuing banknotes, which provides it with constant liquidity. Central Bank money consists of cash (banknotes and coins) and non-cash money (commercial banks' accounts with the central bank).
As a government banker, the Central Bank serves the government's financial transactions, mediates treasury payments, and lends to the government.
The Central Bank is also a bank of banks, that is, commercial banks act as clients of the Central Bank, which keeps required reserves, which allows it to control and coordinate their domestic and foreign activities. In addition, it acts as the lender of last resort for struggling commercial banks, providing them with credit support through the issue of money or the sale of securities. In addition, the Central Bank performs the functions of an interbank settlement center and custodian of the country's gold and foreign exchange reserves. In this latter capacity, the Central Bank serves the country's international financial transactions and controls the state of the balance of payments, acts as a buyer and seller in the international currency markets.
The central bank determines and implements monetary (monetary) policy.
The second level of the banking system is made up of commercial banks. Distinguish between universal and specialized commercial banks. So, banks can specialize, for example: 1) by goals: investment (lending investment projects), innovative (issuing loans for the development of scientific and technological progress), mortgage (issuing loans secured by real estate); 2) by industry: construction, agricultural, foreign economic; 3) by customers: serving only firms, serving only the population, etc.
Commercial banks are private organizations that have the legal right to raise spare cash and lend for a profit.
Therefore, commercial banks perform two main types of operations: passive - to attract deposits and active - to issue loans. In addition, commercial banks carry out settlement and cash, trust (trust), interbank operations (credit - to issue loans to each other and transfer - to transfer money from account to account), securities transactions, operations with foreign currency, etc.
The main part of the income of a commercial bank is the difference between interest on loans and interest on deposits (deposits). Additional sources of bank income can be commissions for the provision of various types of services (settlement and cash, trust, transfer, etc.). Part of the income goes to pay the bank's expenses, which include the salaries of bank employees, equipment costs, the use of computers, cash registers, rent of premises, etc. The amount remaining after these payments is the bank's profit, from which dividends are accrued to the holders bank shares, and a certain part can go to expand the bank's activities.
Money creation by commercial banks. Banking multiplier... The process of making money by commercial banks is called credit expansion, or credit animation. It occurs when money enters the banking sector and deposits of a commercial bank increase, that is, if cash turns into non-cash ... If the amount of deposits decreases (the client withdraws money from his account), the opposite process occurs - credit squeeze.
When considering the credit expansion process, it should be borne in mind that:
> firstly, only universal commercial banks can create money. Neither non-bank credit institutions nor specialized banks can create money;
> secondly, universal commercial banks can create money only under the conditions of a fractional reserve system. If the bank does not issue loans, the money supply does not change, since the amount of cash received on the deposit is equal to the amount of reserves stored in the bank's safe. Therefore, there is only a redistribution of funds between money outside the banking sector and money inside the banking system within the same amount of money supply.
Thanks to the partial reserve system, the maximum increase in the supply of money occurs provided that: a) commercial banks do not store excess reserves and lend out the entire amount of funds in excess of the required reserves; this means that they are using their credit capabilities in full and the reserve ratio is equal to the required reserves ratio; b) once in the banking sector, the money does not leave it and, being issued on credit to the client, does not settle with him in the form of cash, but returns to the banking system again (credited to the bank account).
Thus, the change in the money supply depends on two factors: the value of the reserves of commercial banks, issued on credit, and the value of the bank multiplier. Influencing one or both factors, the Central Bank can change the amount of money supply, pursuing monetary (monetary) policy
Banking multiplier- This is an increase in the money supply (multiplication of money) as a result of deposit and credit operations of commercial banks. This process is regulated by central banks in the framework of monetary policy using the required reserve ratios.
- Yuzhakov O.Yu. Bank management in the context of the economic crisis: international experience. A systemic banking crisis has begun in russia A systemic crisis occurs when bad assets reach
- How does the closed rotational village of Sabetta live in the far north of Sabetta who builds
- How to spend Zapsibcombank bonuses?
- The wives of the richest Russian businessmen and officials (29 photos)