deposit

Examples of deposit in the following topics:

• Example Transactions Showing How a Bank Can Create Money

  • Suppose a customer now deposits $1,000 in Anderson Bank.
  • Brentwood's deposits now total $10,900.
  • Thus, you can see that total deposits were $20,000 before the initial $1,000 deposit, and are now $21,900 after.
  • Mathematically, the relationship between reserve requirements (rr), deposits, and money creation is given by the deposit multiplier (m).
  • The deposit multiplier is the ratio of the maximum possible change in deposits to the change in reserves.

• Other Measurements of the Money Supply

  • MB is the total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed).
  • M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits.
  • M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
  • M3: M2 + all other certificates of deposit (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
  • It is M2 – time deposits + money market funds.

• The Reserve Ratio

  • The reserve ratio is the percentage of deposits that a bank is required to hold in reserves, or funds that are not allowed to be loaned.
  • Banks assume responsibility for consumer deposits and make money by loaning out deposited finds.
  • Therefore, banks with relatively higher deposits are able to supply a larger amount of loanable funds.
  • In order to reduce the risk of a panic or "run on bank" from the perception that a bank may not have adequate liquidity to meet depositor access to cash deposits, central banks have adopted policies to ensure that banks use prudent judgement when assessing the amount of deposits to loan.
  • For example, a reserve ratio of 20% will result in 80% of any given initial deposit being loaned out and if the process of loaning is assumed to continue, the maximum increase in money expansion specific to an initial deposit at a 20% reserve ratio will be equal to the reserve multiplier 1/(reserve ratio) x the initial deposit.

• Measuring the Money Supply: M1

  • More specifically, M1 includes currency and all checkable deposits .
  • Checkable deposits refer to all spendable deposits in commercial banks and thrifts.
  • Imagine that Laura deposits $900 in her checking account in a world with no other money (M1=$900).
  • Mandy deposits the money in a checking account at another bank.
  • The M1 measure includes currency in the hands of the public and checkable deposits in commercial banks.

• Institutions, Markets, and Intermediaries

  • Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
  • Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
  • Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities.
  • Banks convert deposits to loans and thereby increase access to capital by serving as a financial intermediary between savers and borrowers.

• The Fractional Reserve System

  • Banks operate by taking in deposits and making loans to lenders.
  • This is called the fractional-reserve banking system: banks only hold a fraction of total deposits as cash on hand.
  • If, for example, the reserve requirement is 1%, then a bank must hold reserves equal to 1% of their total customer deposits.
  • These assets are typically held in the form of physical cash stored in a bank vault and in reserves deposited with the central bank.
  • To understand this, imagine that you deposit $100 at your bank.

• Measuring the Money Supply: M2

  • Narrow measures include only the most liquid assets, the ones most easily used to spend (for example, currency and checkable deposits).
  • Broader measures add less liquid types of assets (certificates of deposit, etc.).
  • More specifically, near monies include savings deposits, small time deposits (less than $100,000) that become readily available at maturity, and money market mutual funds.

• The Money Multiplier in Reality

  • It assumes that people deposit all of their money and banks lend out all of the money they can (they hold no excess reserves).
  • Second, customers may hold their savings in cash rather than in bank deposits.
  • Imagine that the reserve requirement ratio is 10% and a customer deposits $1,000 into a bank.
  • The bank then uses this deposit to make a $900 loan to another one of its customers.
  • In this case, the $1,000 deposit allowed the bank to create $900 of new money, rather than the $10,000 of new money that would be created if the entire loan proceeds were spent.

• The Demand for Money

  • In economics, the demand for money is the desired holding of financial assets in the form of money (cash or bank deposits).
  • In economics, the demand for money is generally equated with cash or bank demand deposits.
  • This is the equivalent of stating that the nominal amount of money demanded (Md) equals the price level (P) times the liquidity preference function L(R,Y)--the amount of money held in easily convertible sources (cash, bank demand deposits).
  • Reserves come from any source including the federal funds market, deposits by the public, and borrowing from the Fed itself.

• The Special Case of Banking

  • One of the most important of these regulations is deposit insurance.
  • Deposit insurance was designed to prevent such runs on banks.
  • The government said it would stand behind deposits up to a certain level -- $100,000 currently.
  • To protect savings and loan associations and banks against this eventuality, regulators decided to control interest rates on deposits.
  • Interest rates paid on deposits at S&Ls were kept low, but millions of Americans put their money in them because deposit insurance made them an extremely safe place to invest.