Balance Sheet Mechanics of Inter-Bank Loan Transfers
When a loan from one bank (the lending bank) is used for a payment to a customer at another bank (the receiving bank), the settlement involves a transfer of central bank reserves. The lending bank's reserve account is reduced by the payment amount, and the receiving bank's reserve account is increased by the same amount, leaving the total reserves in the banking system unchanged. While the lending bank's newly created deposit liability is extinguished by the transfer, the receiving bank gains a new deposit liability. This results in a net expansion of the aggregate money supply, as the total deposit liabilities across the banking system have increased by the amount of the original loan.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
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Figure 6.12b: Illustrating Inter-Bank Money Creation
Balance Sheet Mechanics of Inter-Bank Loan Transfers
Interbank Market for Reserve Management
Tracking a Loan Payment Across the Banking System
A commercial bank, 'Bank A', approves a new $50,000 loan for a client. The client immediately uses the full amount to pay a contractor who deposits the funds into their account at a different commercial bank, 'Bank B'. Once this transaction is fully settled between the two banks, what is the overall impact on the total reserves and total deposits within the entire banking system?
A company secures a loan from 'Bank A' and immediately uses the funds to pay a supplier, who deposits the payment into their account at a different institution, 'Bank B'. Arrange the following events in the correct chronological order to reflect the inter-bank transfer and settlement process.
A commercial bank creates a new loan for a customer, who then transfers the entire amount to a recipient at a different commercial bank. After the transfer is settled between the two banks using their reserve accounts at the central bank, the initial deposit liability on the lending bank's balance sheet is extinguished, and therefore the aggregate money supply in the economy returns to its pre-loan level.
Learn After
A commercial bank, Bank A, approves a $50,000 loan for a client. The client immediately uses the entire loan amount to purchase a car from a dealership that holds its account at a different commercial bank, Bank B. Once the payment from the client to the dealership is fully processed and settled between the two banks, what is the resulting impact on the balance sheets of the banks and the overall money supply?
Balance Sheet Impact of an Inter-Bank Loan Transfer
Reserve Movements in Inter-Bank Transactions
A client takes out a new loan from Bank A and immediately uses the funds to pay a vendor who banks at Bank B. Arrange the following events in the correct chronological order to reflect the settlement of this transaction.
When a loan created by one bank is used to make a payment to a customer at a different bank, the total amount of central bank reserves held by the entire commercial banking system decreases as part of the settlement process.
Bank Alpha grants a $10,000 loan to a borrower, who immediately uses the funds to pay a supplier with an account at Bank Beta. After the transaction is fully settled between the two banks, match each balance sheet item with the correct resulting change.
The Ripple Effect of a Single Loan
When a loan from one bank is used to make a payment to a customer at a different bank, the settlement process causes a transfer of reserves between the two banks. However, the total quantity of central bank reserves held by the entire commercial banking system ____.
Critiquing an Inter-Bank Transfer Analysis
Analyzing Balance Sheet Transformations in an Inter-Bank Transaction