Types of Institutions
There are three major types of depository institutions:
2.Thrift institutions such as credit unions, savings and loan associations (S&Ls), and savings banks. Credit unions are cooperative organizations, usually restricted to employees of a particular firm or government entity. The savings banks and S&Ls have historically focused their loan activities to the real estate mortgages.
3.Money market mutual funds offer bank-like features. Shareholders of these funds are allowed to write checks against these funds. However, these funds do have restrictions. The mutual funds specify minimum check amounts such as $250.
Their main economic functions include providing liquidity, lowering the cost of borrowing money, and pooling the risk associated with lending money.
All of these institutions make money by charging more for loans than what they pay for deposits, and they are all subject to substantial regulation. Major areas of concern for regulation include reserve requirements, capital requirements, lending rules, and deposit rules. For example, in the past, only commercial banks could offer checking accounts, and savings banks could only offer saving accounts. Those restrictions were relaxed in the 1980s.
Money market mutual funds have been a major force in providing competitive interest rates to short-term depositors. Technological innovation has been a major force in providing new services to customers. For example, crediting interest on a daily basis was not feasible before the advent of modern computer technology.
The Fractional Reserve Banking System
A fractional reserve banking system exists when the amount of reserves banks must keep on hand is less than the amount of their deposits. In the
The Required Reserve Ratio
The required reserve ratio is the percentage of a particular liability category (to the bank), such as savings accounts, that must be held as reserves. If someone deposits $10,000 at a bank and there is a 20% reserve requirement, the bank must keep $2,000 as reserves and can loan out only $8,000. If the reserve requirement is 10%, the bank could loan out $9,000. The $9,000 that is loaned out can be deposited at the original bank or at another bank; 90% of that $9,000, which is $8,100, can then be loaned out. This process continues until the amount of money supply generated is equal to $10,000 × (1 / .1) = $100,000.
The Actual and Potential Deposit Expansion Multipliers
The potential deposit expansion multiplier is the reciprocal of the required reserve ratio. If the required reserve ratio is 5% (.05), the potential deposit expansion multiplier is equal to 1 / .05 = 20.
The actual deposit expansion multiplier is less than the potential deposit expansion multiplier for two reasons:
·Banks may not loan out all available funds (i.e. they may have excess reserves, which are reserves that exceed required reserves)
·Recipients of loans may not deposit the proceeds; they may instead decide to hold them as currency
Goals and Targets of the U.S. Federal Reserve
Financial AdvisorContrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
Personal FinanceReserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
Personal FinanceFractional reserve banking is the banking system most countries use today.
InvestingA bank is a financial institution licensed to receive deposits or issue new securities to the public.
InsightsThese 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
Personal FinanceThe federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
InsuranceLearn more about the Federal Deposit Insurance Corporation (FDIC) and what happens to your deposits over $250,000 if a member bank fails.
InvestingLearn about the tools the Fed uses to influence interest rates and general economic conditions.
InsightsFind out how the Fed manages bank reserves and this contributes to a stable economy.
Personal FinanceTime deposit accounts and call deposit accounts allow customers to earn higher interest in exchange for less access to their cash.