Tracking a Loan Payment Across the Banking System
After the transaction described in the case study is completed, what is the net change in the total amount of deposit money across the entire banking system (i.e., combining both banks)? Explain your reasoning.
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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.