Tuesday, June 16, 2009

bank deposits in the commercial bank balance sheet

on the liability side in the commercial bank balance sheet ,total bank deposits are separated into (1)demand deposits (2) time deposits and (3) deposits of public funds. (these "public funds" are demand deposits if held by the federal government, but the deposits of state and local governments may be either demand or time deposits.)Demand deposits of individuals and business are included in our definition of money, whereas time deposits are referred to as near-money. state and local government deposits of public funds on demand in commercial banks are also included in the federal system is definition of money, though federal government deposits in commercial banks are not.
from this point of view of te individual bank, in increase in its deposits provides added funds with which it can increase its earning asset, such as loans and investments. this appearance of causality from deposits to earning assets, however, is somewhat misleading,because for the banking system as a whole the direction of change is the reverse. whenever cash reserves of the banking system are increased, usually as a result of more reserves supplied by the monetary policy of the federal reserve system, the banks are thereby enabled to acquire more earning assets. when the banks are adding to their total portfolio of loans and investments, their liabilities (demand deposits and time deposits) are also increasing. hence, the supply of money and near-money increases as a direct result of the extension of bank credit by the bank system.

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