Commercial Banks As Sources Of Credit Creation And The Bank Credit Multiplier
Economics notes
Commercial Banks As Sources Of Credit Creation And The Bank Credit Multiplier
➡️ Commercial banks are a major source of credit creation in the economy. They create credit by taking deposits from customers and then lending out a portion of those deposits to borrowers.
➡️ The bank credit multiplier is the ratio of the total amount of credit created by a bank to the amount of reserves it holds. It is an important tool for understanding how banks create credit and how changes in the money supply can affect the economy.
➡️ The bank credit multiplier is affected by the reserve requirement set by the central bank, the amount of deposits held by the bank, and the amount of loans the bank makes. Changes in any of these factors can have a significant impact on the amount of credit created by the bank and, in turn, the money supply in the economy.
How does commercial banking create credit?
Commercial banking creates credit through the process of fractional reserve banking. This process involves banks taking deposits from customers and then lending out a portion of those deposits to other customers. The amount of credit created is determined by the bank�s reserve ratio, which is the percentage of deposits that must be kept in reserve. The remaining portion of the deposits can be loaned out, creating new credit.
What is the bank credit multiplier?
The bank credit multiplier is a measure of the amount of credit that can be created by a commercial bank. It is calculated by dividing the total amount of credit created by the amount of reserves held by the bank. The higher the reserve ratio, the lower the multiplier, and vice versa.
What are the implications of the bank credit multiplier?
The bank credit multiplier has important implications for the economy. It affects the amount of credit available in the economy, which in turn affects the level of economic activity. It also affects the cost of borrowing, as higher reserve ratios lead to higher interest rates. Finally, it affects the stability of the banking system, as higher reserve ratios reduce the risk of bank runs.