Unit 4

What Banks Do

• A bank is a financial intermediary
• Uses liquid assets (i. e. bank deposits) to finance the investments of borrowers.
• Process is known as Fractional Reserve Banking
• A system in which depository institutions hold liquid assets less than the amount of deposits.
• Can take the form of:
1. Currency in bank vaults
2. Bank Reserves: deposits held at the Federal Reserve
• Basic Accounting Review
• T-Account (Balance Sheet)
• Statements of assets and liabilities
  
• Assets (Amounts owned)
• Items to which a bank holds legal claim
• The uses of funds by financial intermediates
• Liabilities (Amounts owed)
• The legal claims against a bank
• The sources of funds for financial intermediaries
• Function of the FED
1. Issues paper currency
2. Sets reserve requirements and hold reserves of the bank
3. Lends money to the banks and charges them interest
4. They are a check clearing service for bank
5. They act as a personal bank for the government
6. They supervise number of banks
7. They control the money supply in the economy