Banking

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Introduction and Summary

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Purpose of Banks

Terms

100% Reserve Banking System - A system in which banks must keep all deposits on hand and ready for withdrawal.

Assets - Cash, stocks, bonds, and physical goods that are stores of wealth and value.

Balance Sheet - An accounting tool where assets and liabilities are compared side by side.

Borrowers - Individuals who take out loans from banks.

Currency - Money, either fiat or commodity, that is commonly used in an economy.

Demand Deposits - Deposits made by in banks that can be withdrawn at any time--that is, on demand.

Deposits - Money given to banks for safekeeping and to earn interest.

Federal Deposit Insurance Corporation - A corporation that insures individual bank accounts up to $100,000 to ensure that the public is confident in the banking system.

Federal Funds Interest Rate - The discount interest rate at which the branch banks of the Fed loan money to other banks.

Federal reserve - The federal group that controls the money supply though monetary policy and fiscal policy.

Federal Reserve Banks - Branches of the Fed that serve as banks for non-government controlled banks by accepting deposits, giving withdrawals, and making loans as needed.

Fiat Money - Money that has no intrinsic value but that is instead only valuable because it is backed and regulated by a governing body.

Financial Intermediary - An entity, like a bank, that works between savers and borrowers by accepting deposits and making loans.

Fiscal Policy - Operations by the Fed that affect the money supply including manipulation of the federal funds interest rate and the reserve requirement.

Fractional Reserve Banking System - A banking system wherein less than 100% of the deposits are required to be held as reserves.

Government Bonds - Bonds issued by the government and bought and sold by the Fed as a form of monetary policy to manipulate the money supply.

Inflation - An increase in the price level over time.

Interest - Money paid by a borrower to a lender in return for the use of money in the form of a loan.

Interest Rate - The rate of interest in the form of percent of the balance due per year.

Lender - One who gives money to be repaid at a later date, with interest.

Liabilities - Money owed.

Loans - Money given by lenders to borrowers.

Monetary Policy - Policy used to affect the money supply employed by the Fed. In particular, this describes the open market operations of buying and selling government bonds.

Money - The stock of assets used in transactions within an economy.

Money Multiplier - The number that describes the change in the money supply given an initial deposit and a reserve requirement.

Money Supply - The total amount of currency in circulation as controlled by Fed policy.

Open Market Operations - The purchase and sale of government bonds by the Fed in order to affect the money supply.

Paper Balances - Deposits that exist on paper but are not backed by physical currency.

Principle - The initial amount of money given as a loan.

Reserve - Money not given out in loans that is available for repaying depositors.

Reserve Requirement - The percent of total deposits required to be held back for repaying depositors. This is controlled by the Fed as a form of monetary policy.

Savers - Individuals who deposit money in banks.

Treasury - The government agency that prints, mints, and stores money.