Class10

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Class10

  1. 1. Economics for Journalists Week 10: The Banking System Jeffrey TimmermansMonday, 15 April, 13
  2. 2. Role of the banking system ✤ To channel individuals’ savings to others who want to borrow money ✤ To serve as a financial intermediaryMonday, 15 April, 13
  3. 3. The Banking System Prime rate Home/car Commercial Bank Loans Interbank Commercial rate Bank Interbank Commercial market Bank Deposits Commercial Deposit rate Home/car Bank Loans Finance Open- Discount Business Company Market window loans Ops Discount rate Commercial lending rate Money Central Market Fund Commercial Bank PaperMonday, 15 April, 13
  4. 4. Key interest rates ✤ Interbank rates Low ✤ Overnight, 1-wk, 1-mth, 3-mth ✤ Deposit rates ✤ Overnight, 1-wk, 1-mth, 3-mth ✤ Commercial lending rate High ✤ Prime (lending) rateMonday, 15 April, 13
  5. 5. Structure of the Banking System ✤ The central bank sets a target rate for overnight lending by banks ✤ Commercial banks borrow from each other to meet short-term needs in the interbank market ✤ Commercial banks take deposits from individuals and lend out some of those deposits ✤ Corporations issue short-term debt in form of commercial paper, which is purchased by banks & money-market fundsMonday, 15 April, 13
  6. 6. The “Shadow Banking System” ✤ Any non-bank financial institution that is subject to less oversight than traditional lenders like commercial banks ✤ Finance companies ✤ Money-market funds ✤ Hedge fundsMonday, 15 April, 13
  7. 7. Interbank rates ✤ H.K.: Hong Kong Interbank Offer Rate (Hibor) ✤ U.K.: London Interbank Offer Rate (Libor) ✤ Fed sets Fed Funds target rate; supply/demand determine Hibor & Libor ✤ Banks’ other lending rates often based on local interbank rateMonday, 15 April, 13
  8. 8. Commercial Banks ✤ Take deposits ✤ Make loans ✤ Deposits are banks’ liabilities ✤ Loans (& reserves) are assets ✤ Pay depositors interest (deposit rate) ✤ Banks keep some reserves, lend out the rest ✤ Earn interest from borrowersMonday, 15 April, 13
  9. 9. Required Reserve Ratio ✤ Typically set by the central bank ✤ Indicates the percentage of deposits a bank must keep as reserves ✤ In U.S., reserve ratio is now 10% for deposits above $55.2 million ✤ An increase in the reserve ratio forces banks to curtail lending, a decrease leads to more lending and an expansion of the money supplyMonday, 15 April, 13
  10. 10. Jeff’s Bank (100% reserve ratio) Assets Liabilities Reserves $100 Deposits $100Monday, 15 April, 13
  11. 11. Jeff’s Bank (10% reserve ratio) Assets Liabilities Reserves $10 Deposits $100 Loans $90Monday, 15 April, 13
  12. 12. How the multiplier works Original deposit $100 Jeff’s Bank lending $90 (.9 x $100) Masato’s Bank lending $81 (.9 x $90) Wylie’s Bank lending $72.90 (.9 x $81) etc. etc. Total money supply $1,000Monday, 15 April, 13
  13. 13. The Money Multiplier 1 reserve ratioMonday, 15 April, 13

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