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Our bank

Our bank. Assets Liabilities + Net Worth. Cash $ 1 million. Net worth$1 million. We buy a building, equipment and invest in government securities. Assets Liabilities + Net Worth. Building etc. $ .5 million. Net worth$1 million. Gov’t Secs $.5 million.

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Our bank

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  1. Our bank Assets Liabilities + Net Worth Cash $ 1 million Net worth$1 million

  2. We buy a building, equipment and invest in government securities Assets Liabilities + Net Worth Building etc. $ .5 million Net worth$1 million Gov’t Secs $.5 million

  3. We attract a million in new checking accounts CIPC $1 million New deposits in checking $1 million Assets Liabilities + Net Worth Building etc. $ .5 million Net worth$1 million Gov’t Secs $.5 million

  4. Checks clear against other banks. Our deposits at the Chicago FED rise to 1 million Deposits at FED $1 million New deposits in checking $1 million Assets Liabilities + Net Worth Building etc. $ .5 million Net worth$1 million Gov’t Secs $.5 million

  5. Relying on new deposits to cover withdrawals we lend out and invest the 1 million at the FED Deposits at FED $1 million Initial 1 million in checking New deposits in checking $1 million Building etc. $ .5 million Assets Liabilities + Net Worth Gov’t Secs $.5 million Net worth$1 million Loans etc. $1 million

  6. The new checks from loans made written to other banks and start to clear against our bank at the FED Deposits at FED $0 Initial 1 million in checking Building etc. $ .5 million Assets Liabilities + Net Worth Gov’t Secs $.5 million Net worth$1 million Loans etc. $1 million

  7. Note that the balance sheet balances. But still we are taking an awful gamble. What is the gamble? The gamble is that new deposits will be just enough to cover current withdrawals.

  8. If we are wrong we’ll be in big trouble! We’ll have to call back in old loans and sell off old investments to raise needed cash.

  9. The required reserve ratio This is the percent of funds deposited in checking that HAVE to be held either at the district FED or as vault cash.

  10. Banks would hold reserves regardless But they would not tend to hold sufficient reserves in bad times.

  11. This at root is why there is a required reserve ratio in our system. Given a 10% ratio our balance sheet would look like the following: Deposits at FED $1,000,000 Initial 1 million in checking Building etc. $ .5 million An additional .9 million Assets Liabilities + Net Worth Gov’t Secs $.5 million Net worth$1 million Loans etc. $.9 million

  12. As the new checks from loans made written to other banks and start to clear against our bank at the FED our balance sheet would look like the following: Deposits at FED $100,000 Initial 1 million in checking Building etc. $ .5 million Assets Liabilities + Net Worth Gov’t Secs $.5 million Net worth$1 million Loans etc. $.9 million

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