Chap 26
Chap 26
Chap 26
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MONEY, BANKS, AND THE FEDERAL RESERVE 219<br />
B. Commercial Banks<br />
1. A commercial bank is a firm that is licensed by the Comptroller of the Currency or by a<br />
state agency to receive deposits and make loans.<br />
2. Table 10.2 shows the aggregate<br />
balance sheet of the commercial<br />
banks in the United States at the<br />
end of June 2003.<br />
3. A commercial bank’s balance sheet<br />
summarizes its business and lists the<br />
bank’s assets, liabilities, and net<br />
worth.<br />
4. The objective of a commercial bank<br />
is to maximize the net worth of its<br />
stockholders.<br />
5. To achieve this objective, banks make risky loans at a higher interest rate than the interest<br />
rate they pay on deposits.<br />
6. But the banks must balance profit and prudence; loans generate profit, but depositors must<br />
be able to obtain their funds when they want them.<br />
7. So banks divide their funds into two parts: reserves and loans.<br />
8. Reserves are the cash in a bank’s vault and deposits at Federal Reserve Banks.<br />
9. Bank lending takes the form of liquid assets, investment securities, and loans.<br />
C. Thrift Institutions<br />
1. The thrift institutions are savings and loan associations, savings banks, and credit<br />
unions.<br />
2. A savings and loan association (S&L) is a depository institution that receives checking<br />
and savings deposits and that makes personal, commercial, and home-purchase loans.<br />
3. A savings bank is a depository institution that accepts savings deposits and makes mainly<br />
mortgage loans.<br />
4. A credit union is a depository institution owned by a social or economic group such as a<br />
firm’s employees that accepts savings deposits and makes mostly consumer loans.<br />
D. Money Market Mutual Funds<br />
A money market fund is a fund operated by a financial institution that sells shares in the<br />
fund and holds liquid assets such as U.S. Treasury bills or short-term commercial paper.<br />
E. The Economic Functions of Depository Institutions<br />
1. Depository institutions make a profit from the spread between the interest rate they pay on<br />
their deposits and the interest rate they charge on their loans.<br />
2. Depository institutions provide four main types of services:<br />
a) Create liquidity by accepting deposits that can be withdrawn instantly and using these<br />
deposits to make long-term loans.<br />
b) Minimize the cost of obtaining funds by pooling many people’s relatively small deposits<br />
into large sums that can be loaned to many borrowers.<br />
c) Minimize the cost of monitoring borrowers by specializing in this activity.<br />
d) Pool risk by lending to many different borrowers so that if one borrower is unable to<br />
pay back the loan the lender loses only a small fraction of total deposits.