1. Copyright 2011The McGraw-Hill Companies 13-1 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show 13 Money Creation

2. Copyright 2011The McGraw-Hill Companies 13-2 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Chapter Objectives Why the S.A. Banking System is characterized by a “Fractional Reserve” System Distinction Between a Bank’s Actual Reserves and Its Required Reserves How a Bank Can Create Money Through Granting Loans The Multiple Expansion of Loans and Money by the Entire Banking System The Monetary Multiplier and How to Calculate it

3. Copyright 2011The McGraw-Hill Companies 13-3 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Fractional Reserve System The Goldsmiths Characteristics –Banks Create Money Through Lending –Fractional Reserve Banks are Subject to “Panics” or “Runs”

4. Copyright 2011The McGraw-Hill Companies 13-4 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Fractional Reserve System Balance Sheet Assets = Liabilities + Net Worth Transactions Needed to Enable Banks to Create Money Through Lending As Follows…

5. Copyright 2011The McGraw-Hill Companies 13-5 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Creating a Bank Vault Cash Transaction 1: Creating a Bank Balance Sheet 1: Pofadder Bank CashR250,000Stock SharesR250,000

6. Copyright 2011The McGraw-Hill Companies 13-6 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Creating a Bank Acquiring Property and Equipment Transaction 2: Acquiring Property and Equipment Balance Sheet 2: Pofadder Bank CashR10,000Stock SharesR250,000 PropertyR240,000

7. Copyright 2011The McGraw-Hill Companies 13-7 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Creating a Bank Accepting Deposits –Receive R100,000 as a Checkable Deposit Transaction 3: Accepting Deposits Balance Sheet 3: Pofadder Bank CashR110,000Checkable Deposits R100,000 PropertyR240,000 Stock SharesR250,000

8. Copyright 2011The McGraw-Hill Companies 13-8 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Creating a Bank Depositing Reserves in the Reserve Bank –Required Reserves –Reserve Ratio Transaction 4: Reserve Ratio = Commercial Bank’s Required Reserves Commercial Bank’s Checkable-Deposit Liabilities

9. Copyright 2011The McGraw-Hill Companies 13-9 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Creating a Bank Transaction 4: Depositing Reserves at the Central Bank Balance Sheet 4: Pofadder Bank CashR0Checkable Deposits R100,000 PropertyR240,000Stock SharesR250,000 ReservesR110,000

10. Copyright 2011The McGraw-Hill Companies 13-10 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Creating a Bank Control –Banking Regulators Asset and Liability –Transactions are Both Transaction 4: Excess Reserves Excess Reserves = - Actual Reserves Required Reserves

11. Copyright 2011The McGraw-Hill Companies 13-11 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Creating a Bank Transaction 5: Clearing a Check Balance Sheet 5: Pofadder Bank Checkable Deposits R50,000 PropertyR240,000 Stock SharesR250,000 ReservesR60,000 Clearing a Check –R50,000 Check Presented for Payment

12. Copyright 2011The McGraw-Hill Companies 13-12 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Money Creating Transactions Transaction 6a: When a Loan is Negotiated Balance Sheet 6a: Pofadder Bank Checkable Deposits R100,000 PropertyR240,000 Stock SharesR250,000 ReservesR60,000 Granting a Loan –R50,000 Loan Deposited to Checking Account LoansR50,000

13. Copyright 2011The McGraw-Hill Companies 13-13 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Money Creating Transactions Transaction 6b: After a Check is Drawn on the Loan Balance Sheet 6b: Pofadder Bank Checkable Deposits R50,000 PropertyR240,000 Stock SharesR250,000 ReservesR10,000 Using the Loan –R50,000 Loan Cashed From Checking Account LoansR50,000 A Single Bank Can Only Lend An Amount Equal to their Preloan Excess Reserves 13.1

14. Copyright 2011The McGraw-Hill Companies 13-14 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show AssetsLiabilities and Net Worth Money Creating Transactions Transaction 7: Buying Government Securities Balance Sheet 7: Pofadder Bank Checkable Deposits R100,000 PropertyR240,000 Stock SharesR250,000 ReservesR60,000 Buying Government Securities –Deposits Payment Into Checking Account SecuritiesR50,000

15. Copyright 2011The McGraw-Hill Companies 13-15 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Money Creating Transactions Profits, Liquidity, and the Market Profit –Loans –Securities Liquidity –Impact Upon Reserves Overnight Bank Loans Repo rate Market –Repo Rate

16. Copyright 2011The McGraw-Hill Companies 13-16 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show The Banking System Multiple-Deposit Expansion The Banking System’s Lending Potential Assumptions: –20% Required Reserves –All Banks “Loaned Up” –Banks Lend All of Excess Reserves

17. Copyright 2011The McGraw-Hill Companies 13-17 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show The Banking System Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Bank L Bank M Bank N Other Banks Bank (1) Acquired Reserves and Deposits (2) Required Reserves (Reserve Ratio =.2) (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) R100.00 80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 21.99 R20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40 R80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59 R80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59 R400.00

18. Copyright 2011The McGraw-Hill Companies 13-18 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show The Monetary Multiplier Monetary Multiplier or Checkable- Deposit Multiplier Monetary Multiplier = 1 Required Reserve Ratio or in Symbols… m = 1 R New Reserves R100 R20 Required Reserves R80 Excess Reserves R100 Initial Deposit R400 Bank System Lending Money Created Graphic Example

19. Copyright 2011The McGraw-Hill Companies 13-19 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show The Monetary Multiplier Reversibility –Making Loans Creates Money –Loan Repayment Destroys Money –Multiple Step Money Expansion –Multiple Step Destruction of Money 13.2

20. Copyright 2011The McGraw-Hill Companies 13-20 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Bank Panics of 1930-1933 Series of Bank Panics Before Deposit Insurance Mass Withdrawals From Fear Move to Cash Reduced Money Supply Through Reduction in Loans Multiple Contraction Slowed Lending and the Economy 1933 National Bank Holiday for One Week Resulted in FDIC and 25% Drop in Money Supply Contributed to the Great Depression Regulation Protects the System Today Last Word

21. Copyright 2011The McGraw-Hill Companies 13-21 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Key Terms fractional reserve banking systemfractional reserve banking system balance sheet vault cash required reserves reserve ratio excess reserves actual reserves monetary multiplier

22. Copyright 2011The McGraw-Hill Companies 13-22 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word Key Terms End Show Next Chapter Preview… South Africa in Brief: Private and Public Sectors