APMacro: Bank Balance Sheet


A single bank in a banking system can lend one dollar for each dollar of its excess reserves. The commercial banking system can lend, that is, can create money, by a multiple of its excess reserves.

A1 Multiple Deposit Expansion
Suppose a person finds a $100 and deposits the $100 in bank A, which adds the $100 to its reserves. Of the newly acquired $100 in currency, 20 percent, or $20 must be earmarked for required reserves on the new $100 checkable deposit, and the remaining $80 goes to excess reserves. A single bank can lend only an amount equal to its excess reserves, therefore bank A can lend a maximum of $80.

A2a Multiple Deposit Expansion
When a loan for this amount is made, bank A’s loans increase by $80 and the borrower gets an $80 checkable deposit.

A2b Multiple Deposit Expansion
We add these figures to bank A’s balance sheet.

A3 Multiple Deposit Expansion
The borrower draws a check for the entire amount of the loan ($80) and gives it to someone who deposits it in bank B, a different bank. Bank A loses both reserves and deposits equal to the amount of the loan. The net results of these transactions is that bank A’s reserves now stand at ($100 – $80 = )$20, loans at $80, and checkable deposits at ($180 – $80 =) $100. Bank A is just meeting the 20 percent reserve ratio.

B1 Multiple Deposit Expansion
Bank B acquires the reserves and the deposits that bank A has lost. When the borrower’s check is drawn and cleared, bank A loses $80 in reserves and deposits and bank B gains $80 in reserves and deposits.

B2a Multiple Deposit Expansion
But 20 percent or $16 of bank B’s new reserves must be kept as required reserves against the new $80 in checkable deposits. This means that bank B has ($80 – $16 =)$64 in excess reserves. It can therefore lend $64 to a new borrower

B2b Multiple Deposit Expansion
We add these figures to bank B’s balance sheet.

B3 Multiple Deposit Expansion
The new borrower draws a check for the entire amount of the loan and deposits it in bank C. The reserves and deposits of bank B fall by $64. As a result of these transactions bank B’s reserves now stand at ($80 – $64 =)$16, loans at $64, and checkable deposits at ($144 – $64 =)$80. After all this, bank B is just meeting the 20 percent reserve requirement.

Arrows-02-june

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