Glossary
Assets (Bank Balance Sheets)
What the bank owns, including its reserves, loans, and securities.
Example:
The loans a bank has made to individuals for homes or cars are its assets because they represent money owed to the bank.
Banks
Financial institutions that accept deposits from the public and make loans.
Example:
When you open a checking account or apply for a mortgage, you are interacting with a bank.
Demand Deposits
Money held in checking accounts that can be withdrawn by customers on demand, serving as a bank's primary liability.
Example:
When you pay for groceries with your debit card, you are using funds from your demand deposits.
Excess Reserves
The amount of money a bank holds beyond its required reserves, which it is free to loan out.
Example:
If a bank has 800 in required reserves, it has $200 in excess reserves that can be lent.
Fractional Reserve Banking
A banking system in which banks hold only a fraction of deposits as reserves and loan out the rest, thereby creating new money in the economy.
Example:
Under fractional reserve banking, if a bank receives a 100 and lend out $900, expanding the money supply.
Liabilities (Bank Balance Sheets)
What the bank owes to others, primarily customer deposits.
Example:
The checking and savings accounts held by customers are considered liabilities for a bank because the bank owes that money back to the depositors.
Loans (Bank Balance Sheets)
Money that a bank has lent out to borrowers, representing an asset for the bank and a key source of its income.
Example:
A bank's portfolio of student loans and business lines of credit are significant components of its assets.
Money Multiplier Formula
A formula (1/Reserve Ratio) that calculates the maximum amount the money supply can expand from an initial change in excess reserves.
Example:
With a reserve ratio of 0.25, the money multiplier formula yields a multiplier of 4, indicating that every new dollar of excess reserves can potentially create $4 in new money.
Required Reserves
The specific amount of money that banks must hold in their vaults or at the Federal Reserve, calculated by multiplying demand deposits by the reserve ratio.
Example:
For a bank with 1,000.
Reserve Ratio (rr)
The fraction of deposits that banks are legally required to keep as reserves, set by the Federal Reserve.
Example:
If the reserve ratio is 10%, a bank must hold 100 in deposits.