bank deposit creation

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Bank deposit creationclick for a larger image
Fig. 15 Bank deposit creation. Deposit creation operated with a 50% reserve-asset ratio in a multibank system.

bank deposit creation

or

credit creation

or

money multiplier

the ability of the COMMERCIAL BANK system to create new bank deposits and hence increase the MONEY SUPPLY. Commercial banks accept deposits of CURRENCY from the general public. Some of this money is retained by the banks to meet day-to-day withdrawals (see RESERVE-ASSET RATIO). The remainder of the money is used to make loans or is invested. When a bank on-lends, it creates additional deposits in favour of borrowers. The amount of new deposits the banking system as a whole can create depends on the magnitude of the reserve-asset ratio. In the example set out in Fig. 15, the banks are assumed to operate with a 50% reserve-asset ratio: Bank 1 receives initial deposits of £100 million from the general public. It keeps £50 million for liquidity purposes and on-lends £50 million.

This £50 million, when spent, is redeposited with Bank 2; Bank 2 keeps £25 million as part of its reserve assets and on-lends £25 million; and so on. Thus, as a result of an initial deposit of £100 million, the banking system has been able to ‘create’ an additional £100 million of new deposits.

Since bank deposits constitute a large part of the MONEY SUPPLY, the ability of the banking system to ‘create’ credit makes it a prime target for the application of MONETARY POLICY as a means of regulating the level of spending in the economy

References in periodicals archive ?
In theory this could increase new capital investment by firms and domestic consumption, via credit creation. But the research showed bank margins were being squeezed, curbing loan growth and damaging banking profits.
By 2014, the year China started to spend money on BRI, credit creation had become so inefficient at home that to generate $1 in GDP, China had to spend $9 in new fixed-asset investment, by the National Bureau of Statistics' estimates.
Some economist believe that interest rates play a crucial role in the efficient allocation of resources aimed at facilitating growth and development of an economy and can be used as a demand management technique for achieving both internal and external balance with specific attention for deposit mobilization and credit creation thus enhancing economic development.
Due to financial and macroeconomic stability concerns, it also believes national governments may prevent it from becoming a parallel source of credit creation outside central banks' monetary policy setting.
In comparison, non-bank credit now constitutes for over 50% of credit creation vs 47% in 2008, with a wide disparity across markets like 15% in New Zealand to over 82% in Ireland.
Tella said that it would encourage the spread of its banking space for deposit mobilisation and credit creation both of which were capable of assisting its survival.
Among the aforementioned late cycle behaviors that have emerged, according to Structured Credit group head Kevin Kendra, include a lack of new credit creation in the leveraged loan market and the fact that most CLO issuance is coming in the form of refinancings and re-pricings of older transactions.
Both raising rates and decreasing its balance sheet are seen as tightening the belt of credit creation.
But while in prior cycles this may have addressed some of the issues plaguing the economy at the time -- excess telecom investment and dot-com speculation in the late 1990s, excess housing investment and credit creation in the mid 2000s -- in this cycle that's not the case.
Hayek introduced his proposal for privately issued competitive currencies at the height of the inflationary surge of the mid-1970s, which he attributed to excessive credit creation by central banks.
He has to his credit creation of several iconic advertising campaigns in the five decades that he worked with all the major advertising firms of the country.
There has been inadequate focus in economics on the different functions that credit creation plays within the economy.

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