The Pros And Cons Of Shadow Banking

The Role of Cash Reserves in Fractional Reserve Banking 1. Introduction The essay seeks to explain the function that cash reserves play in the fractional reserve banking system. Two types of banks operate in this banking system, monetary savings banks and private commercial banks, both banks are unique in a sense of their ability to create money. This ability is explained that, these banks keep fraction of their outstanding deposits liabilities as cash in reserves against these deposits in the process of providing loans and spending.

E. This example shows the increase in the money supply caused by an increase in bank deposits. Explain why this activity by banks is called money creation. (5 points) The activity by bank is called money creation because the central bank and the Fed both rely on banks to implement and enhance the effects.

E. This example shows the increase in the money supply caused by an increase in bank deposits. Explain why this activity by banks is called money creation. (5 points) The activity by bank is called money creation because the central bank and the Fed both rely on banks to implement and enhance the effects.

Funding risk used to be borne by banks as a single entity, however, going through securities, the risk is now spread across several individuals and funding entities. Disintermediation has implication for economics of scale with respect to pooling resources towards funding. This is because the scope to attract funding is now considered to be larger. Resource Utilisation is increased with disintermediation. This is because several funding entities have more opportunities to buy into securities and bond.

The capital business sector is the business sector for securities, where organizations and the legislature can raise long haul stores. The capital business sector incorporates the stock exchange what 's more, the security market. Money related controllers, for example, the U.S. Securities and Exchange Commission, direct the capital markets in their individual nations to guarantee that financial specialists are ensured against extortion. The capital markets comprise of the essential business sector, where new issues are appropriate to financial specialists, and the optional business sector, where existing securities are exchanged. (n.d.).

It customarily involves various types of contract, such as, mandate, loan for use, depositum and deposit-taking. The parties to the bank-customer relationship may, depending on the circumstances, fulfil the role of either debtor or creditor. The bank becomes the owner of money that is deposited or paid into the customer’s account. The customer retains a claim or personal right against the bank. This is known as commixtio, whereby the consumer loses ownership of money deposited into the bank because that deposit mixes with other money of different customers.

The Federal Reserve controls the monetary base through open market operations and extensions of loans to financial institutions, and has better control over the monetary base than over reserves. Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, which complicate control of the monetary base, they do not prevent the Fed from accurately controlling it. 4. A single bank can make loans up to the amount of its excess reserves, thereby creating an equal amount of deposits. The banking system can create a multiple expansion of deposits, because as each bank makes a loan and creates deposits, the reserves find their way to another bank, which uses them to make loans and create additional deposits.

As Kambhu (2007) said ‘In general, a financial institution may be willing to extend credit to the hedge fund against the posting of specific collateral that is valued at no less than the amount of the exposure. This reduction in settlement risk in leveraged trading increases confidence and thereby promotes active financing of leveraged trading’. As a result, this CCRM system could reduce some risks, make hedge funds safer and attract more

• The small businesses have right to get loans with an optimum or bearable interest rate. • The government has a right to induce policies to restrict the risky role of banks in order to protect the money of the tax

Lastly, the final strength is that banks can create money, by using the reserve requirement to their advantage. However, if you have strengths you have weaknesses. One weakness is that, historically banks have lacked innovation. Coupled with customers no longer trusts banks, which equals low customer satisfaction and many banks have low brand recognition (CountyBank).