All Entries Tagged With: "base money"

The Liquidity Test for Banks

Why being liquid is so hot in the money market? In money market the ability of an asset to be convertible to any desirable mode i.e. base money securities is known as its liquidity. If a commodity can be sold easily for no loss in its value the commodity is highly liquid and vice versa. In terms of banking industry liquidity refers to the ability of a bank to pay off its liabilities easily and when required. In other words a banks capacity to remain solvent can also be related to its liquidity. Asset Management Banking Commercial banks and small banks remain solvent and maintain their assets primarily through the deposits held with them by the public. They loan credit to willing customers out of the reserves held by them. These customers usually are on a micro level and involve...

Building Castles on the Sand

The trillion dollars question of monetary base :- The international market does its business with each other backed by their bank credits on their portfolios. These credits extended by banks and other private finance organizations hold as tokens for the credibility and reliability, in other words, trust of companies working with each other. And if combined together, they can give a summation of the country’s wealth and strength. All the credit circulating in the market is backed by a base; a monetary base or base money which nestles with the Federal Reserve. This is the back bone of the financial community and it is held that market credit can be converted into base money upon its maturity. As the name implies the base money is at core the engine upon which debts and credits are...

Fractional Reserve Banking

Tangoing With the Feds :- As per law all the banks in the U.S. are required to bequeath some amount of their capital with the Federal Reserve. This amount is subject to the capital in the bank. For instance from 2008 onwards for deposits up to $44.4 million the reserve requirement is 3% and beyond $ 44.4 million the federal reserve requirement is 10%. The assessment as to amount of capital held is done at a 14 day interval. Banks are free to hold the reserves in any way they see fit subject to availability. It’s customary for banks to keep the amount close to the minimum required. How Banks Meet Reserve Requirements In its day to day functions the reserves held by the banks fluctuate as they move around in the system. Cash withdrawals, payment by cheques, loaning cause the reserves...

Barking Up the Money Tree

Government Spending and the Money Supply :- It is usually held that any government spends the money it collects from the public’s money i.e. tax payers money where as in actuality the government spent money is in all generated by its own means. This money is rerouted back to the government in shapes of taxes and bonds it sells to the public. To equate the balance it should spend at least the same amount it gathers from the public lest it accumulates it and stalls the economic wheel. This would level out the balance of money supply and money demand. Managing the Base Money Supply In lieu of government spending when the government pays the private sector banks it provides them with reserves; these could consequently hamper Federal Reserve’s (state exchequer’s) ability to carry out...